Inter-dealer Trading in Financial Markets*

Trading between dealers who act as market makers is a common feature of most major financial markets. With the exception of equity markets that deal with relatively small order sizes, in most financial markets the customer order is filled by one dealer who then retrades with other dealers. Inter-dealer trading is an integral part of market design, particularly for institutional markets that deal with large orders. While the exact structure of inter-dealer trading is undergoing significant change (as we discuss below) two distinct kinds of inter-dealer trading, sequential trading and limit-order books are dominant in the marketplace. In equity markets like the London Stock Exchange, inter-dealer trading constitutes some 40% of the total volume and occurs mainly via an anonymous limit-order book, although some