Various assets are traded in over-the-counter (OTC) markets which exhibit frictions absent in centralized limit-order markets. We analyze the relative merits of these two market structures in an environment where traders bringing liquidity-driven order flow to the market use price quotes to screen informed counterparties whose expertise is endogenous. In this environment, frictions present in OTC markets, such as timeconsuming search, can promote higher efficiency for certain asset classes. In particular, OTC markets with predictable and exclusive trading encounters encourage expertise acquisition, which is beneficial in asset classes where expertise improves allocative efficiency, but harmful when it causes adverse selection.

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