Post-Trade Transparency in Multiple Dealer Financial Markets
Mark D. Flood
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Kees C. G. Koedijk
Tilburg University - Department of Finance
Tilburg University - Center for Economic Research, Econometrics and Finance Group; Eindhoven University of Technology (TUE) - Department of Industrial Engineering and Innovation Sciences
Columbia University, School of International and Public Affairs
In this paper we examine the effects of the amount of trade disclosure in an experimental financial market, in which nine professional traders set quotes and trade continuously. In addition to these market makers, two computerized external customers interact, representing both informed and liquidity or noise traders. The amount of transaction information is varied, whereas the level of price information is held constant at a low level. From our results it becoms clear that that uninformed traders gain from an increase in the level of transparency. This gain from transparency comes at the cost of the informed traders. In terms of spreads, we find significant wider opening spreads in transparent markets in contrast with opaque markets. The differences in spreadsize dissappear over time in such a way that the spreads in the transparent markets narrow whereas in opaque markets they remain constant. Finally, we find that transparency significantly enhances the price discovery process.
Number of Pages in PDF File: 31
JEL Classification: G12, G14working papers series
Date posted: June 25, 1997
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