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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