An International Trend in Market Design: Endogenous Effects of Limit Order Book Transparency on Volatility, Spreads, Depth and Volume

Posted: 25 Sep 2013 Last revised: 14 Jun 2020

See all articles by Thu Phuong Pham

Thu Phuong Pham

University of Adelaide; IPAG Business School; Financial Research Network (FIRN)

P. Joakim Westerholm

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: July 14, 2013

Abstract

Following other leading international securities markets, the Tokyo stock exchange [TSE] has adopted a publicly displayed but anonymous limit order book, and we ask: how is market quality affected? Accounting for fixed effects and endogeneity, we find increased volatility and higher order book depth at the best bid and ask prices, while total depth is not significantly impacted. This predicts more competitive order strategies in a trading system with anonymous orders but with more visible price levels. Spreads are found to be unaffected by the market design change, in contradiction to previous literature. Complementing the literature, we find volume increases, indicating that the aggregate effect of the design change is positive.

Keywords: Transparency, Broker ID, Market Quality, Limit Order Book

JEL Classification: G10, G15, G18

Suggested Citation

Pham, Thu Phuong and Westerholm, P. Joakim, An International Trend in Market Design: Endogenous Effects of Limit Order Book Transparency on Volatility, Spreads, Depth and Volume (July 14, 2013). Journal of International Financial Markets, Institutions and Money 27, 202-223., Available at SSRN: https://ssrn.com/abstract=2330051

Thu Phuong Pham (Contact Author)

University of Adelaide ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

P. Joakim Westerholm

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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