How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence

The effects of trading institutions on market efficiency and trading volume are examined. The trading institutions are computerized versions of continuous double auction and “clearinghouse” markets. Traders are experienced, profit‐motivated undergraduates. The traded good is a financial asset whose monetary value is state‐ and trader type‐contingent. Traders possess asymmetric private information on asset value. The results show that clearinghouse markets are as informationally efficient as double auction markets and almost as allocationally efficient; the double auction encourages greater trading volume but the clearinghouse provides greater depth; public orderflow information enhances double auction performance but impairs clearinghouse performance.