The University of Arizona. We thank the Business Law and Economics Center of Washington University, as well as the John M. Olin School of Business, for generous financial support. While we retain responsibility for any errors, we are grateful to seminar participants at Washington University, the University of Arizona, Ohio State University, the University of Utah, First Arizona Finance Symposium, the Conference on Financial Markets Reform at Vanderbilt University, and in particular, Brian Kluger, William Christie, Ed Kane, Paul Schultz, Paul Seguin, Hans Stoll, and Susan Woodward.
When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market
Article first published online: 18 APR 2012
1997 The American Finance Association
The Journal of Finance
Volume 52, Issue 2, pages 683–712, June 1997
How to Cite
LAMOUREUX, C. G. and SCHNITZLEIN, C. R. (1997), When It's Not The Only Game in Town: The Effect of Bilateral Search on the Quality of a Dealer Market. The Journal of Finance, 52: 683–712. doi: 10.1111/j.1540-6261.1997.tb04818.x
- Issue published online: 18 APR 2012
- Article first published online: 18 APR 2012
We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large—unlike in models with risk-neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.