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Regulation and Security Design in Concentrated Markets

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  • Ana Babus
  • Kinda Cheryl Hachem

Abstract

Regulatory debates about centralized trading assume security design is immune to market structure. We consider a regulator who introduces an exchange to increase liquidity, understanding that security design is endogenous. For a given security, investors would like to trade in a larger market and, for a given market structure, they would like to trade a safer security. We show that financial intermediaries design riskier securities after the exchange is introduced, even when the exchange leads to the origination of safer underlying assets. The results reflect a relative dilution of investor market power and motivate coordinated policies to improve investor welfare.

Suggested Citation

  • Ana Babus & Kinda Cheryl Hachem, 2021. "Regulation and Security Design in Concentrated Markets," NBER Working Papers 28764, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28764
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    References listed on IDEAS

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    Cited by:

    1. Babus, Ana & Hachem, Kinda, 2023. "Markets for financial innovation," Journal of Economic Theory, Elsevier, vol. 208(C).
    2. Rostek, Marzena, 2021. "Comments on “Regulation and security design in concentrated markets” by A. Babus and K. Hachem (2021)," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 152-154.
    3. Thomas M. Eisenbach & Gregory Phelan, 2022. "Cournot Fire Sales," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(3), pages 508-542, July.

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    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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