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Market Transparency and Fragility

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  • Vives, Xavier
  • Cespa, Giovanni

Abstract

We show that dealers' limited market participation, coupled with an informational friction resulting from lack of market transparency, can make liquidity demand upward sloping, inducing strategic complementarities: traders demand more liquidity when the market becomes less liquid, fostering market illiquidity. This can generate instability with an initial dearth of liquidity degenerating into a liquidity rout (as in a flash crash). In a fully transparent market, liquidity is increasing in the proportion of dealers continuously present in the market; however, in a less transparent market, liquidity can be U-shaped in this proportion and in the degree of transparency.

Suggested Citation

  • Vives, Xavier & Cespa, Giovanni, 2016. "Market Transparency and Fragility," CEPR Discussion Papers 11732, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11732
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    Cited by:

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    2. Zhou, Hao & Elliott, Robert J. & Kalev, Petko S., 2019. "Information or noise: What does algorithmic trading incorporate into the stock prices?," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 27-39.

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    More about this item

    Keywords

    Market fragmentation; Liquidity fragility; Flash crash; Asymmetric information;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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