The Design of Innovative Securities Markets: The Case of Asymmetric Information*

This paper is the first experimental study on Dynamic Market Models (DMM). A DMM is a multiplatform market structure that enables an investor to specify — individually and for each transaction separately — the desired market model within one marketplace. Following the requirements of investors, the prototype of a multiplatform market model is designed and implemented: The VTR (Virtual Trading Room) system allows traders to simultaneously trade stocks via an open orderbook and a bilateral negotiation. The prototype is then used to perform experiments in order to investigate two issues: First, the general acceptance of DMM is questioned. Second, the case of asymmetrically informed participants using innovative market mechanisms is studied. Using the cover story of an experiment previously performed by Lamoureux and Schnitzlein (LS, [LaSc97]), the obtained results from the multiplatform market are compared to a pure “orderbook-market” and to the LS data. The results show that the suggested innovative price discovery mechanisms play a minor role — presumably due to high overall market liquidity. However, liquidity traders sooner accomplish their goals when DMM are introduced. On the other hand, the frequency of informed/uninformed trades increases when the multiplatform structure is employed.

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