Financial Intermediation and the Costs of Trading in an Opaque Market

Municipal bonds trade in opaque, decentralized broker-dealermarkets in which price information is costly to gather. We analyzea database of trades between broker-dealers and customers inmunicipal bonds. These data were only released to the publicwith a lag; the market was opaque. Dealers earn lower averagemarkups on larger trades, even though dealers bear a higherrisk of losses with larger trades. We estimate a bargainingmodel and compute measures of dealer’s bargaining power.Dealers exercise substantial market power. Our measures of marketpower decrease in trade size and increase in the complexityof the trade for the dealer. (JEL G0, G24)