Market Architecture and Global Exchange Efficiency: One Design Need not Fit all Stock Sizes

Abstract

We evaluate the impact of stock market transparency and opacity design features on global trading activity, including the share of traded value for cross-listed stocks. Our methodology relies on a system of simultaneous structural equations estimated for the world's major exchanges. We find that in relatively opaque markets (those revealing little in the way of market depth), large stocks benefit from lower trading costs, lower volatility and higher traded value. Small stocks do best in highly transparent markets. Although several transparency features benefit all stocks, we conclude that transparency requirements can differ such that one design need not fit all stock sizes.

Keywords: market design, exchange trading systems, transparency, opacity, decimalization

JEL Classification: G10, G15, G2