Informed and Uninformed Trading With Correlated Assets: An Experimental Study

The authors examine the use of market and limit orders by informed and uninformed traders in an experimental market with 2 correlated assets. Some traders receive private information about one asset, referred to as the main asset, which also conveys information about the value of another asset, referred to as the substitute. A continuous flow of information allows uninformed traders to form expectations about the liquidation value of each asset. The authors find that insiders submit more market and limit orders than uninformed traders do, and that they are more attracted toward the high-volatility asset, which is the substitute. Moreover, insiders make more money with the substitute than with the main asset, and realize their biggest gains when insider trading is prohibited in the main asset. The results also suggest the use of manipulation strategies by insiders.