The impact of reduced pre-trade transparency regimes on market quality

Polina Kovaleva and Giulia Iori

Journal of Economic Dynamics and Control, 2015, vol. 57, issue C, 145-162

Abstract: This paper studies the effects of pre-trade quote transparency on spread, price discovery and liquidity in an artificial limit order market with heterogeneous trading rules. Our agent-based numerical experiments suggest that full quote transparency incurs substantial transaction costs to traders and dampens trading activity in an order-driven market. Our finding reveals that exogenous restriction of displayed depth, up to several best quotes, does not benefit market performance. On the contrary, endogenous restriction of displayed quote depth, by means of iceberg orders, improves market quality in multiple dimensions: it reduces average transaction costs, maintains higher liquidity and moderate volatility, balances the limit order book, and enhances price discovery.

Keywords: Agent based models; Market transparency; Iceberg orders; Liquidity; Bid-ask spread (search for similar items in EconPapers)
JEL-codes: D4 D8 G1 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:57:y:2015:i:c:p:145-162

DOI: 10.1016/j.jedc.2015.05.011

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