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Trading in Over-The-Counter (OTC) markets is facilitated by broker-dealers, in comparison to public exchanges, e.g., the New York Stock Exchange (NYSE). Dealers play an important role in stabilizing prices and providing liquidity in OTC markets. We apply machine learning methods to model and predict the trading behavior of OTC dealers for US corporate bonds. We create sequences of daily historical transaction reports…
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an exogenous open market with finite liquidity. This endogenously leads to transient price impact in the dealer market. Smoot…
For the last two decades, most financial markets have undergone an evolution toward electronification. The market for corporate bonds is one of the last major financial markets to follow this unavoidable path. Traditionally quote-driven i.e., dealer-driven) rather than order-driven, the market for corporate bonds is still mainly dominated by voice trading, but a lot of electronic platforms have emerged. These electro…
We model a market with multiple dealers who compete for client order flow by dynamically updating their bid and ask quotes for a risky asset. Dealers aim to maximise expected profits while controlling inventory risk by skewing their quotes to attract offsetting order flow (internalisation) or by directly offloading positions in the market (externalisation). Using a variational approach, we derive a closed-form equili…
This paper explores the utility of agent-based simulations in realistically modelling market structures and sheds light on the nuances of optimal dealer strategies. It underscores the contrast between conclusions drawn from probabilistic modelling and agent-based simulations, but also highlights the importance of employing a realistic test bed to analyse intricate dynamics. This is achieved by extending the agent-bas…
In dealer markets, dealers provide prices at which they agree to buy and sell the assets and securities they have in their scope. With ever increasing trading volume, this quoting task has to be done algorithmically in most markets such as foreign exchange markets or corporate bond markets. Over the last ten years, many mathematical models have been designed that can be the basis of quoting algorithms in dealer marke…
Dealers make money by providing liquidity to clients but face flow uncertainty and thus price risk. They can efficiently skew their prices and wait for clients to mitigate risk (internalization), or trade with other dealers in the open market to hedge their position and reduce their inventory (externalization). Of course, the better control associated with externalization comes with transaction costs and market impac…
Market makers play an important role in providing liquidity to markets by continuously quoting prices at which they are willing to buy and sell, and managing inventory risk. In this paper, we build a multi-agent simulation of a dealer market and demonstrate that it can be used to understand the behavior of a reinforcement learning (RL) based market maker agent. We use the simulator to train an RL-based market maker a…
We take a closer look at the life and legacy of Micheal Milken. We discuss why Michael Milken, also know as the Junk Bond King, was not just any other King or run-of-the-mill Junk Dealer, but "The Junk Dealer". We find parallels between the three parts to any magic act and what Micheal Milken did, showing that his accomplishments were nothing short of a miracle. His compensation at that time captures to a certain ext…
We use a principal-agent model to analyze the structure of a book-driven dealer market when the dealer faces competition from a crossing network or dark pool. The agents are privately informed about their types (e.g. their portfolios), which is something that the dealer must take into account when engaging his counterparties. Instead of trading with the dealer, the agents may chose to trade in a crossing network. We …
In this paper, the optimal pricing strategy in Avellande-Stoikov's for a monopolistic dealer is extended to a general situation where multiple dealers are present in a competitive market. The dealers' trading intensities, their optimal bid and ask prices and therefore their spreads are derived when the dealers are informed the severity of the competition. The effects of various parameters on the bid-ask quotes and pr…
We introduce solvable stochastic dealer models, which can reproduce basic empirical laws of financial markets such as the power law of price change. Starting from the simplest model that is almost equivalent to a Poisson random noise generator, the model becomes fairly realistic by adding only two effects, the self-modulation of transaction intervals and a forecasting tendency, which uses a moving average of the late…
We introduce a deterministic dealer model which implements most of the empirical laws, such as fat tails in the price change distributions, long term memory of volatility and non-Poissonian intervals. We also clarify the causality between microscopic dealers' dynamics and macroscopic market's empirical laws.
Abstract Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40$\%$ of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical s…
This paper presents a model for analyzing inventory control policies for dealers that support the sales and service of manufactured goods. The environment faced by dealers is characterized by multiple stochastic demand classes (prioritized into emergency and regular), a principal source for boui emergency and regular requirements, multiple secondary sources for expedite requirements, and constraints on the lead time …
In FX cash markets, market makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to attract or divert the flow and trade with their peers on the dealer-to-dealer segment of the market for hedging purposes. This paper offers a mathematical framework to FX dealers will…
We present a study of price impact in the over-the-counter credit index market, where no limit order book is used. Contracts are traded via dealers, that compete for the orders of clients. Despite this distinct microstructure, we successfully apply the propagator technique to estimate the price impact of individual transactions. Because orders are typically split less than in multilateral markets, impact is observed …
In this paper, we employ the Heston stochastic volatility model to describe the stock's volatility and apply the model to derive and analyze the optimal trading strategies for dealers in a security market. We also extend our study to option market making for options written on stocks in the presence of stochastic volatility. Mathematically, the problem is formulated as a stochastic optimal control problem and the con…
Dealer gamma positioning describes whether option dealers are structurally long or short gamma, shaping how hedging flows amplify or dampen market moves.
Primary dealer holdings track how much inventory dealers are carrying, offering insight into balance-sheet absorption, market-making capacity, and Treasury market strain.
Standing Repo Facility — The Fed backstop for repo market dysfunction and dealer balance-sheet pressure.
Primary Dealer Survey — Desk-level policy expectations that front-run official communications.
Vanna Charm Flow — Second-order greek hedging flows that amplify or dampen spot moves around expiries.
Gamma Hedging — Delta adjustments by dealers that can accelerate trends or pin prices near strikes.
Dealer Gamma Exposure — Aggregate market-maker gamma that can damp or amplify spot.
Dealer Vanna Flows (Derivatives).
Dealer Award Share (Rates).
Balance Sheet Constraint Dealer — Dealer SLR/balance-sheet limits reducing intermediation.
Crypto Market Maker Inventory — Dealer inventory and hedge needs shaping crypto microstructure.
Net Interest Margin broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
Deposit Beta broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
Loan Growth broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
NPL Ratio broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
Provision Cycle broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
CET1 Buffer broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
Leverage Ratio broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
LCR Metric broker-dealer (Banking).
NSFR Metric broker-dealer (Banking).
RWA Density broker-dealer (Banking).
GSIB Score broker-dealer (Banking).
Stress Capital broker-dealer (Banking).
Wholesale Funding broker-dealer (Banking).
Brokered Deposit broker-dealer (Banking).
HTM Marks broker-dealer (Banking).
AFS AOCI broker-dealer (Banking).
Commercial Real Estate Book broker-dealer (Banking).
Card Chargeoff broker-dealer (Banking).
Mortgage Pipeline broker-dealer (Banking).
Trading VaR broker-dealer (Banking).
Market Making Inventory broker-dealer (Banking).
Correspondent Banking broker-dealer (Banking).
Payment Rails Risk broker-dealer (Banking).
Cyber Operational Risk broker-dealer (Banking).
Dealer Balance Sheet US (Liquidity).
AFS AOCI broker-dealer (Banking).
Balance Sheet Constraint Dealer — Dealer SLR/balance-sheet limits reducing intermediation.
Brokered Deposit broker-dealer (Banking).
Card Chargeoff broker-dealer (Banking).
CET1 Buffer broker-dealer — Bank balance-sheet, funding, or regulatory capital concept.
Commercial Real Estate Book broker-dealer (Banking).
Correspondent Banking broker-dealer (Banking).
Crypto Market Maker Inventory — Dealer inventory and hedge needs shaping crypto microstructure.
Cyber Operational Risk broker-dealer (Banking).
Dealer Award Share (Rates).
Dealer Balance Sheet Australia (Liquidity).
Dealer Balance Sheet Canada (Liquidity).
Dealer Balance Sheet carry (Liquidity).
Dealer Balance Sheet CEEMEA (Liquidity).
Dealer Balance Sheet China (Liquidity).
Dealer Balance Sheet disinflation (Liquidity).
Dealer Balance Sheet easing (Liquidity).
Dealer Balance Sheet EM Asia (Liquidity).
Dealer Balance Sheet Euro Area (Liquidity).
Dealer Balance Sheet Japan (Liquidity).
Dealer Balance Sheet LatAm (Liquidity).
Dealer Balance Sheet liquidity-crisis (Liquidity).
Dealer Balance Sheet month-end (Liquidity).
Dealer Balance Sheet quarter-end (Liquidity).