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

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  • Kovaleva, Polina
  • Iori, Giulia

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.

Suggested Citation

  • Kovaleva, Polina & Iori, Giulia, 2015. "The impact of reduced pre-trade transparency regimes on market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 145-162.
  • Handle: RePEc:eee:dyncon:v:57:y:2015:i:c:p:145-162
    DOI: 10.1016/j.jedc.2015.05.011
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    References listed on IDEAS

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    1. Thierry Foucault, 1999. "Order flow composition and trading costs in a dynamic limit order market," Post-Print hal-00459769, HAL.
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    6. Buti, Sabrina & Rindi, Barbara, 2013. "Undisclosed orders and optimal submission strategies in a limit order market," Journal of Financial Economics, Elsevier, vol. 109(3), pages 797-812.
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    17. Ingrid Lo & Stephen G. Sapp, 2005. "Order Submission: The Choice between Limit and Market Orders," Staff Working Papers 05-42, Bank of Canada.
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    1. repec:kap:compec:v:51:y:2018:i:4:d:10.1007_s10614-017-9655-y is not listed on IDEAS

    More about this item

    Keywords

    Agent based models; Market transparency; Iceberg orders; Liquidity; Bid-ask spread;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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