When Can Less Be More? Inducing Dealer Responses in RFQ Platforms

The authors show in a model of RFQ trading that customers may admit only a few dealers, even when more are available, to induce maximum liquidity supply—“less can be more.” The number of admitted dealers is pinned down by a competition elasticity, shaped by dealers’ cost to respond to RFQs. For example, higher search (operating) costs increase (reduce) admitted dealers. A social planner would mandate even fewer dealers than the market outcome, because customers induce excessive dealer competition. The model predicts endogenous market power, yields implications for regulation and design of electronic platforms, and speaks to customer-dealer interactions under market stress.