Can Transparent Markets Survive?

Posted: 1 Feb 2001  

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

This paper investigates whether transparent markets can survive when faced with direct competition from less transparent markets. We first construct a game-theoretic model in which in equilibrium the low-transparency dealers capture early order flow, and use the resulting informational advantage to quote narrower spreads and earn more profits than their more transparent competitors. We then conduct a laboratory experiment that tests and supports all of these predictions. A second experiment shows that most dealers choose to be of lower transparency when they are allowed to do so. However, the informational advantage of low-transparency decreases as there are more such dealers, while the high-transparency dealers get increasing benefit from informed traders who attempt to broadcast deceptive trades. As a result, a small number of transparent dealers persist in our markets.

Keywords: Market microstructure, experimental economics, stock market competition

JEL Classification: G14; G12; D82

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen, Can Transparent Markets Survive?. Journal of Financial Economics, Vol. 55, Issue 3, March 2000. Available at SSRN: https://ssrn.com/abstract=251494

Robert J. Bloomfield (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

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