Trader Anonymity and Market Characteristics

Abstract

We study the impact of trader anonymity on trading behavior and price characteristics. Revealing the identity of informed traders allows the market to better disaggregate the source of orders, but does not guarantee more informative prices. When markets are less anonymous, informed traders protect their information by adopting "bluffing" strategies, e.g., buying overvalued assets. This behavior decreases the price impact of trading, even to the point where informed traders may in fact prefer to trade in less anonymous markets. We extend our analysis to consider implications for price efficiency, information production, and the effects of anonymizing events on market stability.