Abstract:
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This paper analyzes the implications of pre-trade transpareny on market performance. We find that transparency increases the precision held
by agents, however we show that this increase in precision may not be
due to prices themselves. In competitive markets, transparency increases
market liquidity and reduces price volatility, whereas these results may
not hold under imperfect competition. More importantly, market depth
and volatility might be positively related with proper priors. Moreover,
we study the incentives for liquidity traders to engage in sunshine trading.
We obtain that the choice of sunshine/dark trading for a noise trader is
independent of his order size, being the traders with higher liquidity needs
more interested in sunshine trading, as long as this practice is desirable.
Key words: Market Microstructure, Transparency, Prior Information,
Market Quality, Sunshine Trading |