Dividing the Pie

Abstract:     
We examine the consequences of transparency in an experimentalmultiple-dealer market with asymmetrically informed dealers. Fiveprofessional securities traders make a market for a single security.In each trading round, one of the dealers (the "insider") is told thesecurity's true value. We vary both pre-trade and post-tradetransparency by changing the way quote and trade information ispublished. The insider's profits are greatest when price efficiency islowest. Price efficiency, in turn, is reduced by pre-tradetransparency and increased by posttrade transparency. Marketliquidity, measured by dealers' bid-ask spreads, is improved bypre-trade transparency and reduced by post-trade transparency.

Keywords: financial markets, market microstructure, experimental economics, information asymmetry

JEL Classifications: M, M41, G3, G10, G14, D82

Working Paper Series