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Transparency, Liquidity and Price Formation

Barbara Rindi ()

No 159, Royal Economic Society Annual Conference 2002 from Royal Economic Society

Abstract: This paper shows that the results on market transparency from previous literature are reversed when allowing for endogenous information acquisition: transparency reduces liquidity. Most theoretical models demonstrate that transparency enhances liquidity, whilst the results obtained so far by empirical and experimental works have been ambiguous. This paper shows how transparency a .ects the quality of financial markets. We model the market for a risky asset as an open limit-order book and compare three regimes of pre-trade transparency: under full transparency agents can observe the order flow and traders' personal identifiers.

Date: 2002-08-29
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