How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence

Daniel Friedman

Economic Inquiry, 1993, vol. 31, issue 3, 410-35

Abstract: The effects of trading institutions on market efficiency and trading volume are examined. The trading institutions are computerized versions of continuous double auction and clearinghouse markets. Traders are experienced, profit-motivated undergraduates. The traded good is a financial asset whose monetary value is state- and trader type-contingent. Traders possess asymmetric private information on asset value. The results show that clearinghouse markets are as informationally efficient as double auction markets and almost as allocationally efficient; the double auction encourages greater trading volume but the clearinghouse provides greater depth; public orderflow information enhances double auction performance but impairs clearinghouse performance. Copyright 1993 by Oxford University Press.

Date: 1993
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