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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. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1787. Keywords: cheap talk; experimental markets; equilibrium discovery; preopening period; preplay communication History: Received October 10, 2011; accepted May 22, 2013, by Wei Xiong, finance. Published online in Articles in Advance October 23, 2013., 1. Introduction At the opening of the market, there is large uncertainty about supply, demand, and valuations. Market openings can, therefore, be plagued by informational problems and coordination failures. Abstracting [...]

The competition between Island and Nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply. Our empirical strategy takes advantage of the difference between the pricing grids used on Island and Nasdaq, as well as of the decline in the Nasdaq tick. Using the finer grid prevailing on their market, Island limit order traders undercut Nasdaq quotes, much more than they undercut one another. The drop in the Nasdaq tick size triggered a drop in Island spreads, despite the Island tick already being very thin before Nasdaq decimalization. We also estimate a structural model of liquidity supply and find that Island limit order traders earned rents before Nasdaq decimalization. Our results suggest that perfect competition cannot be taken for granted, even on transparent open limit order books with a very thin pricing grid. Key words: competition in financial markets; liquidity supply; trading mechanisms; different tick sizes History: Received December 4, 2008; accepted May 26, 2010, by Wei Xiong, finance., 1. Introduction Exchanges and trading mechanisms increasingly compete for orders. Regulators, such as the Securities and Exchange Commission (SEC) and the European Commission, have encouraged this competition. In the United [...]

Once they have observed information, hindsight-biased agents fail to remember how ignorant they were initially; "they knew it all along." We formulate a theoretical model of this bias, providing a foundation for empirical measures and implying that hindsight-biased agents learning about volatility will underestimate it. In an experiment involving 66 students from Mannheim University, we find that hindsight bias reduces volatility estimates. In another experiment, involving 85 investment bankers in London and Frankfurt, we find that more biased agents have lower performance. These findings are robust to differences in location, information, overconfidence, and experience. Key words: decision analysis; forecasting; finance; hindsight bias History: Received July 24, 2007; accepted December 23, 2008, by George Wu, decision analysis. Published online in Articles in Advance April 23, 2009., 1. Introduction Psychologists have extensively documented the prevalence of cognitive biases and deviations from rational choice. Are these results relevant for actual financial markets? Professionals, operating in their natural habitat [...]

Should management worry about employees' biases, i.e., systematic deviations from rational analysis? We focus on the hindsight bias, which is the inability to correctly remember one's prior expectations after observing [...]