I'm quite sure there are some sophisticated hedge funds out there that play arbitrage in the OTC market. With arbitrage I don't mean the semi-arbitrages (like volarb), but true riskless profits due to temporary dislocations and uncertainties.
I'm just wondering whether these HFs will at a certain point suffer 'reputational risk' in the IDB market, resulting in them progressively getting worse and worse quotes from banks? How does this work actually? Or are we all big boys and as long as the arb is not due to blatant mis-pricing (in which case I understand the bank would like to get a hint from the HF that their price is odd) everybody is happy?
I suppose this is a bit of a game theory question.