Subscribing to Transparency

YingHua He, Ulf Nielsson, Hong Guo and Jiong Yang

No 12-351, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: 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.

Keywords: transparency; liquidity; market microstructure; market design (search for similar items in EconPapers)
JEL-codes: G14 G28 (search for similar items in EconPapers)
Date: 2012-07, Revised 2013-11
New Economics Papers: this item is included in nep-cfn and nep-mst
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Journal Article: Subscribing to transparency (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:26441

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