Bid-ask spreads in multiple dealer settings: Some experimental evidence
Abstract: 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) between eighteen 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 (that is, payment for order flow).
Keywords: Financial markets;
Status: Published in Financial Management, Spring 1999
File(s): File format is application/pdf https://www.frbatlanta.org/-/media/documents/research/publications/wp/1998/wp9809.pdf
Provider: Federal Reserve Bank of Atlanta
Part of Series: FRB Atlanta Working Paper
Publication Date: 1998