Information Processing in Decentralized Multiple Dealership Markets

Abstract

This paper analyzes the short run dynamics and relationship between the customer dealer and the interdealer market. The sample covers euro government bonds issued by members of the EMU (European Monetary Union). During the observation period, all bonds were traded on EuroMTS, an electronic interdealer system for euro benchmark government bonds. The focus of the study is to reveal each market's contribution to the price discovery process of these bonds. The empirical results provide evidence that the customer dealer market dominates the price discovery process for euro benchmark government bonds. However, the contribution of the interdealer market to the price discovery depends on bond characteristics. The share in the price discovery process of the interdealer market is larger for less liquid bonds than for liquid bonds.