When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market

We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large--unlike in models with risk-neutral, competitive dealers....

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Bibliographic Details
Published in:The Journal of finance (New York) 1997-06, Vol.52 (2), p.683-712
Main Authors: LAMOUREUX, CHRISTOPHER G., SCHNITZLEIN, CHARLES R.
Format: Article
Language:English
Subjects:
Competition
Dealers
Economic impact
Economic models
Efficient markets
Electronic trading
Error rates
Laboratories
Liquidity
Market mechanisms
Market periods
Market prices
Nasdaq Composite Index
Order flow
Price efficiency
Profits
Securities trading
Stock brokers
Stock exchange
Stock exchanges
Stocks
Studies
Trade
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Summary:We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large--unlike in models with risk-neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1997.tb04818.x