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Centralized vs Decentralized Markets in the Laboratory: The Role of Connectivity

Alfarno, S., Banal-Estanol, A., Camacho, E., Iori, G. ORCID: 0000-0001-9443-9353 and Kapar, B. (2019). Centralized vs Decentralized Markets in the Laboratory: The Role of Connectivity. City, University of London.

Abstract

This paper compares the performance of centralized and decentralized markets experimentally. We constrain trading exchanges to happen on an exogenously predetermined network, representing the trading relationships in markets with differing levels of connectivity. Our experimental results show that, despite having lower trading volumes, decentralized markets are generally not less efficient. Although information can propagate quicker through highly connected markets, we show that higher connectivity also induces informed traders to trade faster and exploit further their information advantages before the information becomes fully incorporated into prices. This not only reduces market efficiency, but it increases wealth inequality. We show that, in more connected markets, informed traders trade not only relatively quicker, but also more, in the right direction, despite not doing it at better prices.

Publication Type: Monograph (Working Paper)
Additional Information: © The Authors
Publisher Keywords: Experiments, financial markets, diffusion of information, decentralized trading
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics
URI: https://openaccess.city.ac.uk/id/eprint/23520
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