Agents’ Behavior on Multi-Dealerto-Client Bond Trading Platforms
By Jean-David Fermanian, Oliver Gueant,
and Arnaud Rachez
Discussant:
Zvi Wiener
The Hebrew University of Jerusalem
9th Financial Risks International Forum
The goal
Use a unique database to describe the behavior
of clients and dealers in a multi-dealer OTC
market.
The method
Markov chain Monte Carlo method to estimate
the distributions of the quotes provided by the
dealers and reservation prices of the clients.
2
Corporate bond market
Many similar products – there is typically no
single and transparent book of orders.
Dealers keep inventories and provide quotes
only when requested by clients.
Recently there are trading platforms that allow
simultaneous request for quotes from several
(1-6) dealers.
3
Assumptions
Normal distribution of reservation values of
clients.
Skew exponential power distribution of dealer’s
prices.
Why not assuming that the dealers
have a similar distribution but
translate them to quoted prices
strategically?
4
Buy orders
quotes – red, reservation prices - green
Sell orders
quotes – red, reservation prices - green
Competition
The best quote distribution
Impact of size
Suggestions
Strategic behavior of dealers:
• Silent collusion in less profitable transactions
• Competition in most profitable deals
• “Punishment” for breaking collusion
• Stronger collusion when a client needs to sell
Technical remarks:
• Check the impact of size!!
• Regularization can speed the convergence.
10