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Bid-Ask Spreads in Multiple Dealer Settings: Some Experimental Evidence

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  • Lucy F. Ackert
  • Bryan K. Church

Abstract

We report the results of an experiment designed to investigate the behavior of quoted spreads in multiple dealer markets. We manipulate verbal communication (not allowed and allowed) and order preferencing (not allowed, allowed, and allowed with order flow payment) across 18 sessions. Without preferencing, spreads are wider when communication is allowed. With preferencing (and no order-flow payments), individuals do not have incentives to narrow the spread and a wide spread may be maintained without a collusive agreement. However, spreads narrow somewhat when individuals are given the opportunity to compete using alternatives to price (i.e., payment for order flow).

Suggested Citation

  • Lucy F. Ackert & Bryan K. Church, 1999. "Bid-Ask Spreads in Multiple Dealer Settings: Some Experimental Evidence," Financial Management, Financial Management Association, vol. 28(1), Spring.
    • Handle: RePEc:fma:fmanag:ackert99
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    Cited by:

    1. S. Ghon Rhee & Ning Tang, 2013. "Can quote competition reduce preferenced trading? A reexamination of the SEC’s 1997 order handling rules," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(1), pages 243-264, March.
    2. Loistl, Otto & Schossmann, Bernd & Veverka, Alexander, 2004. "Tick size and spreads: The case of Nasdaq's decimalization," European Journal of Operational Research, Elsevier, vol. 155(2), pages 317-334, June.
    3. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2006. "Does internalization diminish the impact of quote aggressiveness on dealer market share?," Journal of Financial Intermediation, Elsevier, vol. 15(1), pages 108-131, January.
    4. Chung, Kee H. & Chuwonganant, Chairat & McCormick, D. Timothy, 2004. "Order preferencing and market quality on NASDAQ before and after decimalization," Journal of Financial Economics, Elsevier, vol. 71(3), pages 581-612, March.
    5. Lucy F. Ackert & Bryan K. Church, 1998. "Competitiveness and price setting in dealer markets," Economic Review, Federal Reserve Bank of Atlanta, vol. 83(Q 3), pages 4-11.

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