How do you adjust market making models from the equity space to the dealer space. For example, a bond dealer that cannot go short to make a market will naturally have a different quoting mechanism than a two sided equity market maker. How do you model this?

Similarly, how does one model odd lot liquidity premium? A security may have a quoted bid/ask on round lots, but there may be a premium on odd lots not observed

  • $\begingroup$ That might surprise you but a bond dealer can totally go short, it's quite common actually. $\endgroup$ – Lliane Jan 30 '19 at 2:03
  • $\begingroup$ Not if there's yield restrictions, e.g. US munis $\endgroup$ – Kch Jan 30 '19 at 3:30

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