Impact of Competition and Panel Size on Transaction Costs

Putting multiple counterparties in competition is rationally perceived as a way to reduce transaction costs. However, the process of establishing and maintaining relationships with dealers is costly, and thus it is not always economical to have more counterparties. Moreover, a higher panel size may induce more information leakage. Therefore, there is a balance between more competition and potential information leakage to arrive at an optimal panel size for a given trade. In this report, we leverage BestX optin pool data to empirically examine the impact of competition and panel size on transaction costs.

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