Should securities markets be transparent?

Ananth Madhavan, David Porter, Daniel Weaver

Research output: Contribution to journalArticlepeer-review

112 Scopus citations

Abstract

Market transparency lies at the heart of debate about floor versus automated trading systems, the informational advantages of market makers, and inter-market competition between trading systems. Since changes in transparency regimes are rare, analysis of each event becomes more crucial in our ability to evaluate prevailing theory accurately. We examine the natural experiment affected by the Toronto Stock Exchange when it publicly disseminated the limit order book on both the traditional floor and on its automated trading system. This change in transparency regime allows us to isolate the effects of increased transparency while controlling for stock-specific factors and for type (floor or automated) of trading system. We find that the increase in transparency reduces liquidity. In particular, execution costs and volatility increase after the limit order book is publicly displayed. We also show that the reduction in liquidity is associated with significant declines in stock prices.

Original languageEnglish (US)
Pages (from-to)265-287
Number of pages23
JournalJournal of Financial Markets
Volume8
Issue number3
DOIs
StatePublished - Aug 2005

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Limit order book
  • Microstructure
  • Transparency

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