Do prices in the unmediated call auction reflect insiderinformation? – An experimental analysis

The unmediated call auction is a useful trading mechanism to aggregate dispersedinformation. Its ability to incorporate information of a single informed insider,however, is less well understood. We analyse this question by presenting a simplecall auction game where both auction prices and limit prices of uninformed tradersre°ect potential insider information. The predictions of the model are tested inthe laboratory. While an insider improves the call auction outcomes in terms ofincreasing trading volume, uninformed traders fail to incorporate the (potential)insider information in their limit prices. We also derive an equilibrium relation-ship between auction returns and transaction costs similar to the relations thatcan be found in market microstructure models of continuous markets and whichare commonly applied to estimate transaction costs. The experiment provides agood environment to assess the usefulness of this method to estimate transactioncosts.