Lifting the Veil: An Analysis of Pre-Trade Transparency at the Nyse

42 Pages Posted: 7 Nov 2008

See all articles by Ekkehart Boehmer

Ekkehart Boehmer

Singapore Management University - Lee Kong Chian School of Business

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Lei Yu

University of Notre Dame

Multiple version iconThere are 3 versions of this paper

Date Written: January 2003

Abstract

This paper investigates an important feature of market design: pre-trade transparency, defined as the availability of information about pending trading interest in the market. We look at how the NYSE s introduction of OpenBook, which enables traders off the exchange floor to observe depth in the limit order book in real time, affects the trading strategies of investors and specialists, informational efficiency, liquidity, and returns. We find that traders attempt to manage the exposure of their limit orders: the cancellation rate increases, time-to-cancellation shortens, and smaller orders are submitted. The new information OpenBook provides seems to cause traders to prefer managing the trading process themselves, rather than delegating this task to floor brokers. We also show that specialists participation rate in trading decreases and the depth they add to the quote goes down, consistent with a loss of their informational advantage or with being "crowded out" by active limit order strategies. We detect an improvement in the informational efficiency of prices after the introduction of OpenBook. Greater pre-trade transparency leads to some improvement in displayed liquidity in the book and a reduction in the execution costs of trades. We find that cumulative abnormal returns are positive following the introduction of OpenBook, consistent with the view that improvement in liquidity affects stock returns.

Suggested Citation

Boehmer, Ekkehart and Saar, Gideon and Yu, Lei, Lifting the Veil: An Analysis of Pre-Trade Transparency at the Nyse (January 2003). NYU Working Paper No. S-DRP-03-06, Available at SSRN: https://ssrn.com/abstract=1296373

Ekkehart Boehmer (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Singapore

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Lei Yu

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556
United States
574-631-9935 (Phone)
574-631-5255 (Fax)

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