A Laboratory Test of Flow Trading
Forthcoming, AEJ: Microeconomics 2026
Perceived shortcomings in the dominant asset market format, CDA, have provoked reform proposals including Flow, which features gradual trading. We report a laboratory experiment comparing formats in a simple single-asset private values environment. We find that Flow reduces price volatility, enhances liquidity, and encourages traders to send fewer and larger orders, indicating more effective shredding. In our simple environment, both formats deliver comparable trading volume, allocative efficiency and price efficiency.
Recommended citation: Friedman, D. & Li, Y. & López Vargas, K. (2025). "A Laboratory Test of Flow Trading." Forthcoming at American Economic Journal: Microeconomics.