Thursday, June 24, 2010

counterparty to both seller and buyer

Say Bill Gates wants to buy something at $2m and S’pore government wants to sell the same thing at $1m.

 

In Equities, both buyer and seller can discover the last trade price. I think some exchanges also publish order books. Both seller and buyer will adjust their prices.  Not much of a bid/ask spread exists in such an open and liquid market. When filled, I guess buyer and seller know the counterparty.

 

In muni and other illiquid fixed income markets, bid/ask spread is large. Often the dealer acts as counterparty to both sides when he sees an arbitrage opportunity. Buyer and seller don’t know who they traded with – they each trade with the dealer.

 

In an illiquid market, dealer can also buy and hold. Car dealership model.  Again, dealer is counterparty to both sides.

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