Mandatory Disclosure in Oligopolistic Market Making

Seongjin Kim and Jin Hyuk Choi

Papers from arXiv.org

Abstract: We develop a multi-period Kyle-type model that incorporates both mandatory disclosure of informed trades and imperfect competition among market makers. We prove the existence and uniqueness of a linear equilibrium and show that the liquidity-enhancing effect of disclosure is fundamentally linked to the degree of market-making competition. Disclosure lowers trading costs by reducing price impact, and its marginal benefit is strictly larger when competition is weak. We empirically validate this prediction using the 2002 Sarbanes-Oxley Act disclosure reform as a natural experiment. A difference-in-differences analysis of U.S. equities confirms that the spread reduction following enhanced disclosure is significantly larger for stocks with fewer active market makers.

Date: 2026-04
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