Dividing the Pie
We examine the consequences of transparency in an experimental multiple-dealer market with asymmetrically informed dealers. Five professional securities traders make a market for a single security. In each trading round, one of the dealers (the "insider") is told the security's true value. We vary both pre-trade and post-trade transparency by changing the way quote and trade information is published. The insider's profits are greatest when price efficiency is lowest. Price efficiency, in turn, is reduced by pre-trade transparency and increased by posttrade transparency. Market liquidity, measured by dealers' bid-ask spreads, is improved by pre-trade transparency and reduced by post-trade transparency.
|Keywords||experimental economics, financial markets, information asymmetry, market microstructure|
|Publisher||Erasmus Research Institute of Management (ERIM)|
Flood, M.D., Koedijk, C.G., van Dijk, M.A., & van Leeuwen, I.W.. (2002). Dividing the Pie (No. ERS-2002-101-F&A). Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/248