Bid-Ask Spreads in Multiple Dealer Settings: Some Experimental Evidence
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).
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Volume (Year): 28 (1999)
Issue (Month): 1 (Spring)
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"Collusion in uniform-price auctions: experimental evidence and implications for Treasury auctions,"
FRB Atlanta Working Paper
95-5, Federal Reserve Bank of Atlanta.
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- Godek, Paul E., 1996. "Why Nasdaq market makers avoid odd-eighth quotes," Journal of Financial Economics, Elsevier, vol. 41(3), pages 465-474, July.
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- Eugene Kandel & Leslie M. Marx, 1999. "Payments for Order Flow on Nasdaq," Journal of Finance, American Finance Association, vol. 54(1), pages 35-66, 02.
- Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
- Huang, Roger D. & Stoll, Hans R., 1996. "Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE," Journal of Financial Economics, Elsevier, vol. 41(3), pages 313-357, July.
- Oliver Hansch & Narayan Y. Naik & S. Viswanathan, 1999. "Preferencing, Internalization, Best Execution, and Dealer Profits," Journal of Finance, American Finance Association, vol. 54(5), pages 1799-1828, October.
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