TY - JOUR
T1 - Subscribing to Transparency
AU - He, Yinghua
AU - Nielsson, Ulf
AU - Guo, Hong
AU - Guo, Jiong Yang
PY - 2014
Y1 - 2014
N2 - The paper empirically explores how more trade transparency affects 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, the results show that the additional data disclosure increased trading activity, but also increased transactions costs through wider bid-ask spreads. Thus, in contrast to popular policy belief, the paper finds that more transparency need not improve market liquidity. Second, the paper finds a particularly strong immediate liquidity impact accompanied by altered trading behavior, which suggests a significant impact on institutional traders subscribing relatively early. Lastly, since the effective level of market transparency is bound to depend on how many traders are subscribing to the data, the study can empirically establish the functional form between market-wide transparency and liquidity. The relationship is 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.
AB - The paper empirically explores how more trade transparency affects 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, the results show that the additional data disclosure increased trading activity, but also increased transactions costs through wider bid-ask spreads. Thus, in contrast to popular policy belief, the paper finds that more transparency need not improve market liquidity. Second, the paper finds a particularly strong immediate liquidity impact accompanied by altered trading behavior, which suggests a significant impact on institutional traders subscribing relatively early. Lastly, since the effective level of market transparency is bound to depend on how many traders are subscribing to the data, the study can empirically establish the functional form between market-wide transparency and liquidity. The relationship is 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.
KW - Liquidity
KW - Market design
KW - Market microstructure
KW - Transparency
U2 - 10.1016/j.jbankfin.2014.04.009
DO - 10.1016/j.jbankfin.2014.04.009
M3 - Journal article
SN - 0378-4266
VL - 44
SP - 189
EP - 206
JO - Journal of Banking & Finance
JF - Journal of Banking & Finance
IS - 1
ER -