Experimental Asset Markets – Regulation and Design of Fragmented Markets

Project Start:01/2016
Researchers:Peter Ockenfels, Christian Wilde
Category: Financial Markets, Experiment Center
Funded by:LOEWE

In a dynamically changing market environment, with new types of market places (e.g. dark pools) and new forms of trading (e.g. high frequency trading), regulatory measures are constantly being debated and implemented to ensure well-functioning markets. These regulatory measures include tick size limits, transaction taxes, minimum holding periods, and short sale constraints, among others. Two dimensions of well-functioning markets are of particular relevance, i.e. market efficiency and market stability. At times, these dimensions may be in conflict. Certain types of secondary market design may be good for one dimension while they come at a cost for the other dimension. Similarly, regulatory measures aimed at improving one dimension may impair the other. In this subproject, various forms of asset markets are implemented in a controlled laboratory experimental setting. The aim is to better understand the consequences of different forms of secondary market design as well as different regulatory measures for both, market efficiency and market stability. This will help identify an optimal market setup. Moreover, following up on Krahnen, Ockenfels, and Wilde (2014), the effects of various types of regulation are analyzed in the presence of ambiguity, i.e. the realistic case that the true underlying probability distribution is not known to investors. A further aspect of the study is to test experimentally investors’ choice of a trading venue under different regulatory conditions. As such, this subproject is set up to complement the research done in the other subprojects by using the method of laboratory experiments.