When to Introduce Electronic Trading Platforms in Over-the-Counter Markets?

I study a hybrid over-the-counter (OTC) market structure in which traders have the choice of obtaining an asset either in a bilateral market or on an electronic trading platform. In a hybrid market (HM), turnover is higher and expected prices are lower than in a pure bilateral market (PBM). I present sufficient conditions under which dealer profits are higher in the HM than in the PBM and vice versa. Dealers can increase their profits in the HM by colluding to keep their activity on the platform at a certain level. The model also delivers several other empirical implications regarding prices, trading volume and the traders’ choices of trading venue under the two different market structures.