Inter-Dealer trading is an important but rarely discussed aspect of many financial markets. This paper allows for trading between market makers on the basis of asymmetric information. In a two-period setting we show that market makers having an informational advantage to their competing market makers will act as quasi-insiders, i.e. they will use their superior information to make quasi-insider profits in trading in the Inter-Dealer market. In our setting this lowers the best available price in the first trading period and therefore leaves the liquidity trader in a better position whereas in the second trading period the adverse selection component for all quoting market makers becomes stronger and therefore raises the best available price. Inter-Dealer trading distributes the cost of insider trading among liquidity traders in both periods.
Download is not available
