The More You See, the Less You Get: Price-Competing Insiders Under Different Trading Mechanisms
32 Pages Posted: 10 Aug 1998
Date Written: February 25, 1998
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: Suggested Citation