Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210744 
Year of Publication: 
2019
Series/Report no.: 
Staff Report No. 892
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Dealers, who strategically supply liquidity to traders, are subject to both liquidity and adverse selection costs. While liquidity costs can be mitigated through inter-dealer trading, individual dealers' private motives to acquire information compromise inter-dealer market liquidity. Post-trade information disclosure can improve market liquidity by counteracting dealers' incentives to become better informed through their market-making activities. Asymmetric disclosure, however, exacerbates the adverse selection problem in inter-dealer markets, in turn decreasing equilibrium liquidity provision. A non-monotonic relationship may arise between the partial release of post-trade information and market liquidity. This points to a practical concern: a strategic post-trade platform has incentives to maximize adverse selection and may choose to release information in a way that minimizes equilibrium liquidity provision.
Subjects: 
inter-dealer markets
liquidity
information design
platforms
JEL: 
D62
D82
G14
G23
Document Type: 
Working Paper

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