Articles

Equilibrium Discovery and Preopening Mechanisms in an Experimental Market

B. BIAIS, C. BISIERE, S. POUGET

Management Science

March 2014, vol. 60, n°3, pp.753-769

Departments: Finance

Keywords: cheap talk; experimental markets; equilibrium discovery; preopening period; preplay communication

http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2013.1787


We experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade. We allow a call auction to be preceded by a preopening or not, preopening orders to be binding or not, and the opening time to be deterministic or random. When the preopening is nonbinding, traders place manipulative orders, reducing the credibility of preplay communication. Random market opening deters manipulation, but also hinders communication by making it costly. Gains from trade are maximized when preopening orders are binding. This enables some traders to place early limit orders, attracting further liquidity


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