Over-the-counter markets vs. double auctions: A comparative experimental study

• We study an over-the-counter (OTC) experimental market with bilateral and private offers.
• We compare its efficiency with a double-auction (DA) market, where offers are public.
• We find that OTC markets are less efficient than DA markets.
• Efficiency loss in OTC markets draws from closing prices below the competitive price.
• Shocks increasing the competitive quantity improve the OTC’s efficiency.

We study an electronic over-the-counter (OTC) market, in which each agent looks for the best counterpart through bilateral negotiations. We compare its performance with the standard electronic double-auction (DA) market, in which traders post their quotes publicly. We show that the lack of information in the OTC market induces an efficiency loss, characterized by an average closing price below the competitive price and by a traded quantity below the competitive quantity. We further test the robustness of these findings when exogenous shocks modify the competitive equilibrium. Among other things, we show that supply shocks increasing the competitive quantity improve OTC’s efficiency.