Abstract
We study the effect of generalized exchange as a stabilizing mechanism for the flows of resources in financial markets. In an analysis of on-line trading in a major interbank market for liquidity we find that for regular market transactions generalized exchange is unlikely to be observed in the short-term, but emerges forcefully in longer-term. This result is consistent with our prediction that generalized exchange may be understood only with reference to the temporal micro-structure of transactions linking occupants of market roles. We also find that, for market transactions institutionally classified as large, generalized exchange does not operate in the shorter-term and is unlikely to emerge in the longer-term. This empirical result is consistent with our prediction that generalized exchange does not operate as a stabilizing mechanism for asymmetric market transactions when they involve higher levels or risk. Together, the results of the study clarify some of the contingent elements that trigger (or defuse) generic social mechanisms in decentralized systems of exchange like, for example, markets.
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