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The Opportunity for Conspiracy in Asset Markets Organized with Dealer Intermediaries

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  • Cason, Timothy N

Abstract

This article reports an asset market experiment in which asymmetrically informed traders transact through competing dealers. Dealers face a classic adverse selection problem because some traders have private information regarding the asset value while other traders are uninformed. When dealers cannot communicate outside the market, they price the asset competitively and the market is generally informationally efficient. When dealers communicate privately between periods, they collude successfully to widen spreads and increase profit. Another treatment permits traders to post limit orders, while still allowing dealers to communicate. Limit orders restore informational efficiency and narrow spreads but cause dealers to earn negative trading profits. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 13 (2000)
Issue (Month): 2 ()
Pages: 385-416

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Handle: RePEc:oup:rfinst:v:13:y:2000:i:2:p:385-416

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Cited by:
  1. Lamoureux, Christopher G. & Schnitzlein, Charles R., 2004. "Microstructure with multiple assets: an experimental investigation into direct and indirect dealer competition," Journal of Financial Markets, Elsevier, Elsevier, vol. 7(2), pages 117-143, February.
  2. Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, Springer, vol. 1(1), pages 73-107, 01.
  3. Steven Tucker & Charles Noussair & Charles N. Noussair & Steven Tucker, 2013. "Experimental Research On Asset Pricing," Journal of Economic Surveys, Wiley Blackwell, vol. 27(3), pages 554-569, 07.
  4. Darren Duxbury, 2005. "Experimental evidence on trading behavior, market efficiency and price formation in double auctions with unknown trading duration," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(8), pages 475-497.
  5. Yavas, Abdullah, 2002. "Endogenous outside options in coordination games: experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 47(2), pages 221-236, February.
  6. de Jong, Cyriel & Koedijk, Kees & Schnitzlein, Charles, 2002. "Stock Market Quality in the Prescence of a Traded Option," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3173, C.E.P.R. Discussion Papers.

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