Experiments on Percolation of Information in Dark Markets

Abstract

In dark markets, order submissions are bilateral, and transaction prices are known only to the trading counterparties. Here, we study to what extent the information aggregation theory proposed by Duffie and collaborators predicts outcomes in a laboratory version of such markets. We find that prices aggregate the available information but not in the strict sense of the theory, where prices converge exponentially fast to average private signals. Prices instead fluctuate within bands around this average. The band widths reflect, in the best case, the precision of the average signal and, otherwise, the precision of a single private signal.