The More You See, the Less You Get: Price-Competing Insiders Under Different Trading Mechanisms

32 Pages Posted: 10 Aug 1998

See all articles by Mark D. Flood

Mark D. Flood

R. H. Smith School of Business, U. of Maryland

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Kees C. G. Koedijk

Tilburg University - Department of Finance

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Irma W. van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE)

Date Written: February 25, 1998

Abstract

We examine the extent to which the consequences of insider trading for a financial market depend on the trading mechanism in an experimental multiple dealer asset market. In this market, five professional securities traders make a market in a single asset. In each trading round, one of the market makers receives inside information about the ex-post liquidation value of the asset. The insider thus competes on price directly with the other market makers. We create different trading mechanisms by varying the way quotes and trades are disclosed over the rounds. We find that efficiency is greatest, insider profits are lowest, and bid-ask spreads are smallest in the most transparent trading mechanism.

JEL Classification: G12, G14

Suggested Citation

Flood, Mark D. and Huisman, Ronald and Koedijk, Kees G. and Van Dijk, Mathijs A. and van Leeuwen, Irma W., The More You See, the Less You Get: Price-Competing Insiders Under Different Trading Mechanisms (February 25, 1998). Available at SSRN: https://ssrn.com/abstract=92590 or http://dx.doi.org/10.2139/ssrn.92590

Mark D. Flood

R. H. Smith School of Business, U. of Maryland ( email )

College Park
College Park, MD 20742
United States

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Mathijs A. Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Irma W. Van Leeuwen

Maastricht University - Limburg Institute of Financial Economics (LIFE) ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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