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Financial Intermediation and the Costs of Trading in an Opaque Market

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  • Richard C. Green
  • Burton Hollifield
  • Norman Schürhoff

Abstract

Municipal bonds trade in opaque, decentralized broker-dealer markets in which price information is costly to gather. We analyze a database of trades between broker-dealers and customers in municipal bonds. These data were only released to the public with a lag; the market was opaque. Dealers earn lower average markups on larger trades, even though dealers bear a higher risk of losses with larger trades. We estimate a bargaining model and compute measures of dealer’s bargaining power. Dealers exercise substantial market power. Our measures of market power decrease in trade size and increase in the complexity of the trade for the dealer.

Suggested Citation

  • Richard C. Green & Burton Hollifield & Norman Schürhoff, 2007. "Financial Intermediation and the Costs of Trading in an Opaque Market," The Review of Financial Studies, Society for Financial Studies, vol. 20(2), pages 275-314.
    • Handle: RePEc:oup:rfinst:v:20:y:2007:i:2:p:275-314.
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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