Discussion — Lecture 10: Dealers and Liquid Security Markets

This session covers Lecture 10: Dealers and Liquid Security Markets

This lecture is all about dealers. It emphasizes the concept of "market liquidity" as distinct from "funding liquidity" and introduces the Treynor model of the economics of the dealer function. We're starting by looking at security dealers, but we'll be using this model for the rest of the course and expanding it to other types of dealers, including money dealers (banks).

Key take-aways are that dealers use inventories absorb order flow mismatches and translate funding liquidity into market liquidity (shiftability). We also explore the idea of matched-book dealers and the importance of gross exposure versus net exposure.

Lecture Notes

Lecture 10 Discussion Thread