شفافیت بازار، کیفیت بازار، و تجارت درخشان

This paper analyzes the implications of pre-trade transparency on market performance. 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. The traders with higher liquidity needs are more interested in sunshine trading, as long as this practice is desirable.

One of the most surprising phenomena in the microstructure of financial markets is the heterogeneity in pre-trade transparency exhibited by different trading venues.1 Although one could argue that most of the modern stock trading platforms distribute information on depth, accessible to traders either by subscribing directly to the market feed, or by purchasing a consolidated feed, it is also true that in the last ten years there has been a tendency to introduce anonymity into stock, bond, and foreign exchange markets.2 Similarly, we are nowadays envisioning the evolution to dark trading in exchange markets.3 An investigation on dark trading can be found in Bloomfield, O'Hara, and Saar (2011). They compare visible markets in which all orders must be displayed, iceberg (or reserve) markets that allow both displayed and partially displayed orders, and hidden markets in which orders can be non-displayed.4 There is broad agreement that transparency matters; it affects the informativeness of the order flow and, hence, the process of price discovery, but the key effects of transparency on security markets are complex and contradictory. As pointed out by Eom, Ok, and Park (2007, p. 319) “…there is no consensus on whether an increase in pre-trade transparency results in an improvement or deterioration in market quality.” These authors study changes in pre-trade transparency in the Korea Exchange. They conclude that market quality is increasing in pre-trade transparency. In the same line, Boehmer, Saar, and Yu (2005) find that the introduction of OpenBook by the NYSE leads to a more active management of trading strategies and improvements in terms of liquidity and informational efficiency. These results contrast with findings derived in Madhavan, Porter, and Weaver (2005). This paper shows that an increase in pre-trade transparency in the Toronto Stock Exchange leads to wider spreads, lower depth, and higher volatility. This is consistent with the empirical evidence from the French Stock Exchange, where liquidity increased after anonymity was introduced (Foucault, Moinas, and Theissen, 2007), the same occurred when brokers identification codes were removed at the Tokyo Stock Exchange (Comerton-Forde, Frino, and Mollica, 2005). Similarly, the experiments by Bloomfield, O'Hara, and Saar (2011) support the robustness of informational efficiency and liquidity in opaque regimes too. In this paper we focus on anonymity, which is a particular aspect of pre-trade transparency. When broker identities are displayed, investors learn about order flows.5 Thus, we investigate the effects of disclosing information about the composition of the order flow to market participants. Depending on who makes the disclosure decision, two types of pre-trade transparency can be distinguished: mandatory/prohibited and voluntary. In the former, the decision whether to reveal (or not to reveal) information about the composition of the order flow is taken by the exchange. In the later, the investors voluntarily decide whether to reveal the orders. One of the studies focused on the implications of the first type of pre-trade transparency is Madhavan (1996). He compares two trading mechanisms, called opaque and transparent. In the opaque market, the exchange does not reveal any information about the composition of the order flow, whereas in the transparent market the exchange reveals the price insensitive component that comes from traders who have liquidity needs. He shows that there exists an inverse relationship between price volatility and market depth; for some parameter configurations, an increase in transparency delivers the desirable properties of higher liquidity and lower price volatility, whereas for others it can exacerbate volatility and decrease liquidity. These results are derived under the proviso that rational investors hold improper or non-informative priors about the liquidation value of the risky asset.6 We here propose to frame Madhavan's analysis in a more canonical way. We assume that rational investors are endowed with proper priors. We show that in competitive markets, transparency increases market liquidity and reduces price volatility,7 whereas under imperfect competition, the implications of market transparency are ambiguous. More importantly, the inverse relationship between price volatility and market liquidity, obtained in competitive markets or when investors have improper priors, may not hold with imperfect competition and proper priors (i.e., the inverse relationship between market depth and price volatility reported in Madhavan, 1996 may not hold if investors have proper priors).8 If market depth and volatility are negatively related, an increase in transparency either stabilizes prices and increases market liquidity (both of them suitable properties of a financial market) or increases volatility and reduces liquidity (both of them undesirable for a market). Since preferences for both of these market indicators are aligned, one could conclude that transparency is unambiguously a good or a bad property for a market to have. However, if such a (negative) relation does not hold, then there are trade-offs among these two market indicators, and a clear ranking between transparent and opaque markets may not exist. Additionally, we find that transparency increases the precision of traders' predictions about the liquidation value. However, the comparison on market liquidity across market structures also depends on prior specification, as with proper priors the opaque market is deeper for a larger parameter specification set. This paper also addresses the issue of voluntary disclosure of the orders, prior to trading, of some liquidity traders to the other participants, a practice known as sunshine trading. 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. Moreover, as long as sunshine trading is desirable, the traders with higher liquidity needs find this practice more profitable. Sunshine trading has also been analyzed by Admati and Pfleiderer (1991).9 They find that the identification of liquidity orders reduces the trading costs of those who preannounce, but its effects on the trading costs and welfare of other traders are ambiguous. They also show that sunshine trading increases the informativeness of the price, whereas it reduces the variance of the price change. Admati and Pfleiderer consider a continuum of informed agents, who are price-takers and their motive for trading is information. We consider a finite number of informed traders, who behave strategically and their motive for trading is information and hedging. Thus, our results assess the impact of relaxing the assumption of a continuum of informed agents in their conclusions. Another difference between Admati and Pfleiderer's paper and ours is that we endogenize the choice of the preannouncement. The remainder of this paper is organized as follows. Section 2 outlines the notation and the hypotheses of the model. Section 3 characterizes the unique symmetric linear equilibrium in a general framework. Section 4 examines the implications of transparency when the disclosure decision is taken by the exchange and Section 5 deals with the choice of sunshine/dark trading by individuals. Section 6 provides some concluding comments. Finally, proofs are relegated to the Appendix.