A Double Auction Market with Signals of Varying Precision

A computerized double auction market with human traders is employed to examine the relation of price and volume under conditions of asymmetric information. In this market, the informed traders receive higher precision signals than the uninformed traders. The relation of price and volume has been suggested as an important factor in the process of information revelation whereby information held by informed traders is transferred to uninformed traders. In contrast, the no-trade theorems suggest that trade should not occur at all between informed and uninformed traders. The results show trading volume within the informed group to be positively correlated with signal precision. In situations of asymmetric information, uninformed trading activity as measured by volume/precision correlations declines significantly as the precision of the signals of informed traders increases. However, the presence of asymmetric information does not lead to a zero trade condition for either the informed or the uninformed traders.Experimental, Double Auction, Information Precision, Trading Volume, Asymmetric Information