Who is at the Core of Financial Networks? The Role of Meeting Technologies

We study decentralized trading networks where agents differ in both their time-varying taste for an asset and the constant frequency at which they meet others. We show that a high meeting rate dampens the effect of the idiosyncratic taste on an agent's net valuation of an asset. As a consequence, the identity of the agents with a ``moderate'' valuation, and thus at the core of the financial network, remains relatively stable. This overcomes a common empirical deficiency of search-theoretic models of over-the-counter markets. In the model, traders not only differ in their time-varying taste for the asset, but also in the speed at which they trade. This implies that the option value of search differs across traders, and this option value moderates the impact of the flow value on a trader's net valuation of an asset. A higher option value of search for high frequency traders gives rise to fan shaped iso-value curves in the two-dimensional type space. As a result, the model offers a theory of intermediation in which the endogenous intermediators, that is the agents who are at the center of the intermediation chain, is quite stable. Moreover, the model sheds light on efficiency aspects of high frequency trading. We study whether an ex-ante investment into a meeting technology is efficient in an environment where agents are both buyers and sellers depending on whom they meet. Our preliminary results suggest that the well-known results in Hosios (1990) generalize to this environment.