Journal of Political Economy Vol. 132 No. 5 2024
Competition and Information Leakage
Abstract
When seeking to trade in over-the-counter markets, institutional investors typically restrict both the number of potential counterparties they contact and the information they disclose (e.g., by requesting two-sided rather than one-sided quotes). We rationalize these important facts in a model featuring endogenous front-running. Although an additional contact intensifies competition and aids in finding a natural counterparty, it also intensifies information leakage—which can be costly if it helps a losing dealer to front-run. We also address information design: the client optimally provides no information about her trading direction when requesting quotes. We conclude with implications for market design and regulation.
- DOI
- 10.1086/727709
- Volume
- 132
- Issue
- 5
- Pages
- 1603-1641
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref