However, payment systems are not run by a ‘central planner’, but are populated by independent banks interacting strategically. We therefore look at the equilibrium liquidity/routing choices. A typical equilibrium here has banks routing part of their payments to RTGS, and part into the LSM, with the reliance on the LSM increasing with the price of liquidity. Despite the fact that such an outcome is inefficient (the planner would choose either of the two streams, never both), it can still be better than the one emerging without the LSM. So, an LSM may lead to a ‘second- best’ outcome, improving on the.
