Search Results

This chapter introduces the institutional setting of over-the-counter (OTC) markets and raises some of the key conceptual issues associated with market opaqueness. An OTC market does not use a centralized trading mechanism, such as an auction, specialist, or limit-order book, to aggregate bids and offers and to allocate trades. Instead, buyers and sellers negotiate terms privately, often in ignorance of the prices currently available from other potential counterparties and with limited knowledge of trades recently negotiated elsewhere in the market. OTC markets are thus said to be relatively opaque; investors are somewhat in the dark about the most attractive available terms and about whom to contact for attractive terms. Prices and allocations in OTC markets are, to varying extents, influenced by opaqueness and by the role of intermediating brokers and dealers.

In this paper, we notice that a large proportion of modern financial markets, and the near totality of derivatives markets are OTC markets where bilateral contracts are exchanged between counterparties in the absence of any centralised structure. Our thesis is that to be useful, a critical perspective on modern finance should take full account of the nature of these markets, which exhibit no transparency of prices and offer little guarantee as for the efficiency of competition mechanisms. We propose to characterise the nature of OTC markets using Boltanski and Chiapello's concept (1999/2005) of the connexionist world. This provides, we argue, a renewed perspective on the role of innovation in modern finance. We then emphasize the difficulty of the connexionist grammar of worth to develop principles of justice in OTC markets, which are characterised by their technicality, their deterritorialization and the infinity of potential members. We suggest potential tracks to struggle more efficiently against the drifts of connexionist logic as they arise on financial markets and their spillover effects on societies.

By the beginning of the twenty-first century the role of commodity exchanges was to set reference prices for both commodities and financial products. Actual trading took place directly between producers and consumers or buyers and sellers. The exchanges provided heavily traded standardized contracts that were highly liquid, but charged for the service they provided and imposed strict rules and regulations. In contrast, direct trading between buyers and sellers was conducted free of charge and customized to suit the interests of particular buyers and sellers. It was those contracts traded away from the exchanges that many blamed for the crisis because of their contribution to increased risk taking. As a result there were moves to ban such contracts and to bring all derivatives trading onto regulated exchanges. However, derivatives proved to be essential features of volatile markets and exchanges were unable to provide the ease and flexibility that users found in the OTC market. As a result the derivatives market recovered from the crisis as the products it provided remained indispensable.

This chapter presents a simple introduction to asset pricing in over-the-counter markets. Investors search for opportunities to trade and bargain with counterparties, each counterparty being aware that failure to conduct a trade could lead to a costly new search for a counterparty. In equilibrium, whenever there is gain from trade, the opportunity to search for a new counterparty is dominated by trading at the equilibrium asset price. The asset price reflects the degree of search frictions. Under conditions, illiquidity premia are higher when counterparties are harder to find, when sellers have less bargaining power, when the fraction of qualified owners is smaller, and when risk aversion, volatility, or hedging demand is larger. Supply shocks cause prices to jump, and then “recover” over time, with a pattern that depends on the degree of search frictions. The chapter shows how the equilibrium bargaining powers of the counterparties are determined by search opportunities using the approach of Rubinstein and Wolinsky (1985).

This paper surveys a market instead of an agent in a market. Specifically, the survey examines how the individual agent’s behavior of an informal trading spot are forged into integrated action, which, as a unit force, ignites reactions from related markets and triggers regulations and enforcements. In consequence, a market is generated and a corresponding border is defined, given an institutional matrix. The case we survey is the emerging capital market in China. With the launch of reform in 1978, China’s goods markets were booming robustly over a decade while its capital markets lagged behind. Beginning in the 1990s, an economic renaissance, later called Property Exchanges (PEs), has been thriving, though down and up, to 250 spots (half of them under the name of Intellectual Property Exchanges, IPEs). The idiosyncrasy of PEs (IPEs) genesis does not fit into the development patterns of a capital market and venturing a path tantalizing our vision of what a market and hence, a market economy, would have been and will be demonstrating. Comprehensively reporting PIPEs status creates further challenging explorations. This preliminary survey employs four sections, (1) the genesis of property and intellectual property exchanges (PIPEs), (2) the renaissance of PIPEs with public-style goods shortage, (3) the current status of PIPEs and its comparative advantage over OTC’s market and (4) a solution guide for policy proposals, to report the author’s findings and to invite further studies.

This chapter describes a simple model of the “percolation” of information of common interest through an over-the-counter market with many agents. It also includes an explicit solution for the cross-sectional distribution of posterior beliefs at each time. It begins with the basic information structure for the economy and the setting for search and random matching. It then shows how to solve the model for the dynamics of the cross-sectional distribution of information. The remainder of the chapter is devoted to market settings and to extensions of the model that handle public releases of information, the receipt of new private information over time, and the release of information among groups of more than two agents at a time.

This chapter shows how the intraday allocation and pricing of overnight loans of federal funds reflect the over-the-counter interbank market in which these loans are traded. It provides estimates of how the likelihood that some bank i borrows from some other bank j during a particular minute t of a business day, as well as the interest rate on the loan, depend on the prior trading relationship between these two banks, the extents to which their balances at the beginning of minute t are above or below their normal respective balances for that time of day, their overall levels of trading activities, the amount of time left until their end-of-day balances are monitored for reserve-requirement purposes, and the volatility of the federal funds rate in the trailing 30 minutes.

This chapter introduces the modeling of search and random matching in large economies. The objective is to build intuition and techniques for later chapters. After some mathematical prerequisites, it defines the notion of random matching. It then invokes the law of large numbers to calculate the cross-sectional distribution of types of matches. This is extended to multiperiod search, first in discrete-time settings and then in continuous time. The optimal search intensity of a given agent, given the cross-sectional distribution of types in the population, is characterized with Bellman's principle. The chapter then briefly takes up the issue of equilibrium search efforts.

Though markets are normally associated with regulated institutions such as exchanges of far greater importance was that trading which took place outside them. Ranked among the largest and most active financial markets in the world were those involving fixed income financial instruments and currencies, where trading took place through direct contact between buyers and sellers, the intermediation of inter-dealer brokers and, increasingly, the use of electronic platforms that matched sales and purchases. These markets were essential tools used by banks in their constant adjustment of assets and liabilities across time and space, as well as type, or the lending and borrowing they did between each other so as to profitably employ the resources at their command. This was a world in flux that was pushing traditional exchanges and the voice brokers towards oblivion, though leaving a role for those who negotiated bespoke deals or handled complex products. That was the position on the eve of the Global Financial Crisis, and then resumed thereafter. The advance of the electronic trading platforms proved unstoppable, sweeping away all rivals that failed to embrace the revolution taking place.

By the 1990s the pressures on traditional stock exchanges were so intense that inertia was no longer an option. These pressures included the globalization of investment, deregulation, dismantling of capital controls, cheap and rapid communication, and powerful computing, The effect was to undermine the grip that exchanges had once exerted over national stock markets. No longer were the members of exchanges the filter through which buying and selling passed because of the control they exercised over access to both information and the market. Alternative means of trading stocks were proliferating, undermining and then destroying the exclusive privileges long enjoyed by those belonging to stock exchanges. Leading this attack on the power of stock exchanges were the megabanks. As these banks grew in scale and scope, extending their activities around the globe, they were either able to internalize many transactions or trade between themselves. In the process they cut out the exchanges, bypassing, and the charges and restrictions they imposed. There had long been an ambiguous relationship between banks and exchanges, as they were both rivals and heavy users. The combination of the megabanks, interdealer brokers, and electronic markets was rendering exchanges redundant in the 1990s, forcing them to respond through diversification and mergers.