Subscribing to Transparency

The paper empirically explores whether more trade transparency improves or deteriorates market liquidity. The analysis takes advantage of a unique setting in which the Shanghai Stock Exchange offered more trade transparency to market participants subscribing to a new software package. First, in contrast to popular policy belief, the paper finds that more transparency need not improve market liquidity. Second, since the effective level of market transparency is bound to depend on how many traders are subscribing to the data, this study is able to empirically estimate the functional form between market-wide transparency and liquidity. The relationship is shown to be non-monotonic, which can explain the lack of consensus in the existing literature where each empirical study is naturally confined to specific parts of the transparency domain.