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Preferencing, Internalization of Order Flow, and Tacit Collusion: Evidence from Experiments

Published online by Cambridge University Press:  06 April 2009

Brian D. Kluger  and
Steve B. Wyatt
Brian D. Kluger
Affiliation:
brian.kluger@uc.edu, CBA/Finance, University of Cincinnati, Cincinnati, OH 45221, and Groupe ESC Toulouse, 20 bd. Lascrosses, Toulouse 31068, France
Steve B. Wyatt
Affiliation:
steve.wyatt@uc.edu, CBA/Finance, University of Cincinnati, Cincinnati, OH 45221.
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Abstract

This paper examines preferencing arrangements and tacit collusion in laboratory asset markets. In the experiments, dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote. Although some markets were highly competitive, several markets reached a collusive equilibrium with wide spreads and near complete internalization of order flow. The paper further examines the role of market transparency and passed order flow on quote-setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 3 , September 2002 , pp. 449 - 469
Copyright
Copyright © School of Business Administration, University of Washington 2002

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