Abstract
We conduct laboratory experiments incorporating different market structures and insiders who compete with imperfectly informed traders. The insiders possess perfect information regarding the fundamental value of the tradable asset, whereas the imperfectly informed participants receive a noisy signal of fundamental value. In addition to the two trader types, we vary the market design by using either a stand-alone continuous double auction market or a continuous double auction market preceded by either a transparent or a nontransparent opening call auction. The results provide insights into whether and how insiders try to stay undetected, how their profits are accumulated and what market structures are advantageous for insiders.
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Notes
A second reason for this type of payout function is that it allows for relatively large marginal incentives, while ruling out the possibility of bankruptcy. Furthermore, convex incentives, and incentives determined by a trader’s rank relative to others, are not uncommon in markets outside the laboratory. See for example Acker and Duck (2006), Basak et al. (2007), Brown et al. (1996), Chevalier and Ellison (1997), Elton et al. (2003), or James and Mark (2000).
12 participants make decisions in 6 trading periods in each of the 7 sessions in a treatment.
Orders submitted earlier, conversely, would be ignored by other traders. Since orders can be cancelled at any time, they would constitute a form of “cheap talk”.
This may be the case if the misleading order is not about to come to execution because orders with higher buying or lower selling prices have been submitted.
Orders with price outliers (i.e. more that 75 % away from the fundamental value) are not included, since their submission had to be either accidental or possibly based on the hope for an unintended click by another participant.
We do not report profit in absolute currency units because of the changing fundamental values.
Note that in the CM (CMT) 1 (2) insider(s) accumulated profit in the CA but did not trade in the CDA, while 92 (43) earned profit in the CDA only. However, almost all insiders placed orders in the CA.
In the questionnaire over 90 % of the subjects answered “not at all” or “not very much” when being asked “I was able to estimate exactly how many insiders were present in a trading period” on a four-item Likert scale.
This is a finding from the literature which was not, and cannot, be tested within this experimental study. A corresponding analysis, taking into account the long-term influence of insider trading, would however be a valuable contribution to the literature.
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We thank the Faculty of Social and Economic Sciences at the Karl-Franzens-University Graz for access to the Max Jung laboratory and subject pool. We thank Erik Theissen for valuable discussions, and participants at the 24th Mini EURO Conference in Izmir, Turkey in June 2010 and participants at the EURO Working Group Workshop in Graz in November 2009 for helpful feedback. Financial support from the Faculty of Social and Economic Sciences and the Research Management and Service at the Karl-Franzens-University Graz is gratefully acknowledged.
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Hornung, P., Leopold-Wildburger, U., Mestel, R. et al. Insider behavior under different market structures: experimental evidence on trading patterns, manipulation, and profitability. Cent Eur J Oper Res 23, 357–373 (2015). https://doi.org/10.1007/s10100-014-0359-2
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DOI: https://doi.org/10.1007/s10100-014-0359-2