DOES ORDER PREFERENCING MATTER

This study examines how order preferencing affects the competitiveness and efficiency of laboratory financial markets. We operationalize pre ferencing by allowing some dealers to execute a portion of the order f low by matching the most favorable quotes available. Increasing the pr oportion of order how that is preferenced can increase bid-ask spreads , reduce the informational efficiency of prices, and benefit dealers a t the expense of liquidity traders. Preferencing has none of these eff ects, however, when two or more dealers are not receiving preferencing orders. Preferencing may significantly degrade market performance if preferencing arrangements affect all, or virtually all, dealers. (C) 1 998 Elsevier Science S.A. All rights reserved.