Dividing the Pie
48 Pages Posted: 18 Jan 2003
Date Written: 29 2002, 10
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: financial markets, market microstructure, experimental economics, information asymmetry
JEL Classification: M, M41, G3, G10, G14, D82
Suggested Citation: Suggested Citation