Pre-trade Transparency and the Information Content of the Limit Order Book
Market Microstructure and Nonlinear Dynamics - Keeping Financial Crisis in Context, edited by Gilles Dufrénot, Fredj Jawadi and Wael Louhichi (Eds), Springer-Verlag, 2014
31 Pages Posted: 26 Aug 2011 Last revised: 8 Feb 2015
Date Written: December 9, 2013
This chapter investigates the influence of improved pre-trade transparency on the information content of the limit order book. Data from two natural experiments are examined: when the Sydney Futures Exchange increased the limit order book disclosure from the best bid and ask level to the best three price levels in 2001 and from the best three to the best five price levels in 2003. Evidence shows that the limit order book contains information on future return and volatility. The limit order book also becomes more informative following the two improvements in pre-trade transparency, with stronger result for the first event. The findings of this study highlight a diminishing benefit of additional limit order book disclosure.
Keywords: Limit Order Book, Pre-trade Transparency, Information Content, Interest Rate Futures
JEL Classification: G10, G20, G24
Suggested Citation: Suggested Citation