Marketmaking in the Laboratory: Does Competition Matter?
Jan Krahnen () and
No 4, Working Paper Series: Finance and Accounting from Department of Finance, Goethe University Frankfurt am Main
This paper is the first experimental study of the effects of competition and adverse selection on the performance of market maker (MM-) markets. Information distribution may is either symmetric or heterogeneous. MM-markets are either monopolistic (the specialist markets), or competitive (the multi MM-market). Welfare comparisons are with respect to a continuous double auction (DA-) market. Informed subjects receive an imperfect signal of the true state of the world. We find three main results. First, competition among market makers significantly reduces the bid-ask spread, and increases transaction volume. Second, competition among market makers induces competitive undercutting, yielding net trading losses for market makers as a group in most periods. Third, from the perspective of uninformed traders, a competing MM-regime is optimal, since it minimizes their expected trading losses.
Keywords: market microstructure; dealer market; bid-ask spread; competition (search for similar items in EconPapers)
JEL-codes: C91 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
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Journal Article: Marketmaking in the Laboratory: Does Competition Matter? (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:fra:franaf:4
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