An experimental examination of the flow of irrelevant information across markets (original) (raw)
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SSRN Electronic Journal, 2000
Recently exchanges have been supplementing their tape revenue by directly selling trade and quote data to some traders. We analyze how this practice affects the cost of capital, market liquidity and welfare by studying a twoperiod economy in which rational traders can purchase information about past transactions from the exchanges. In an economy in which traders are endowed with private signals about asset value, allowing the exchange to sell price data increases the cost of capital and worsens market liquidity relative to a world in which all traders freely observe previous prices. However, selling price data reduces the cost of capital and increases liquidity relative to an economy in which no traders can observe price information. If traders have to decide whether to purchase private signals, as well as whether to purchase price data, selling price data can cause traders to reduce their effort to gather information on the underlying asset. This secondary effect may increase the equilibrium cost of capital, but paradoxically it results in greater liquidity. Our welfare analysis also shows that as more previous price information is present in the market, noise traders are made better-off and speculative rational traders are made worse-off. In our view, allowing exchanges to sell price information is undesirable because it generally reduces efficiency and market quality. We believe that the practice should be restricted.
Journal of Economic Interaction and Coordination, 2019
The study at hand investigates the performance of a continuous double auction, and a call market mechanism in an experimental asset market where the presence of insiders is neither certain nor common knowledge. Inspired by Plott and Sunder (J Political Econ 90(4):663-698, 1982) and Camerer and Weigelt (J Bus 64(4):463-493, 1991), we test whether a discrete time mechanism of trading, like the call market, is able to prevent the occurrence of information mirages and to promote higher informational efficiency both in periods with and without insiders. We find that information mirages are widespread and equally likely to occur in the two trading mechanisms. Moreover, our results clearly show that call markets are as informationally efficient as double auction markets both in periods without and with inside information, thus allowing for equal profit sharing between insiders and non-insiders in the latter case. The only appreciable advantage of call markets is a significant reduction of price volatility when no inside information has entered the market, thus stabilizing prices in moments of high uncertainty.