Immediacy Provision and Matchmaking

Dealers can choose between two intermediation methods: providing immediacy to customers using their own inventory and making matches between customers’ order flows. We show that dealers have an incentive to prioritize inventory turnover for immediacy provision rather than making matches between customers. Compared with a counterfactual scenario without this incentive, dealers in equilibrium provide immediacy to more customers in order to extract extra rents. Compared with the counterfactual, this incentive decreases equilibrium price for immediacy but increases the bid–ask spread. The incentive to prioritize immediacy provision lowers welfare for assets with high substitutability but raises welfare for assets with low substitutability. Our analysis has potential policy implications for the Volcker rule, which can be viewed as the counterfactual. This paper was accepted by Agostino Capponi, finance.