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An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume

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  • Phuong Pham, Thu
  • Joakim Westerholm, P.

Abstract

Following other leading international securities markets, the Tokyo Stock Exchange (TSE) has adopted a publicly displayed but anonymous limit order book, and we ask: how is market quality affected? Accounting for fixed effects and endogeneity, we find increased volatility and higher order book depth at the best bid and ask prices, while total depth is not significantly impacted. This predicts more competitive order strategies in a trading system with anonymous orders but with more visible price levels. Spreads are found to be unaffected by the market design change, in contradiction to previous literature. Complementing the literature, we find volume increases, indicating that the aggregate effect of the design change is positive.

Suggested Citation

  • Phuong Pham, Thu & Joakim Westerholm, P., 2013. "An international trend in market design: Endogenous effects of limit order book transparency on volatility, spreads, depth and volume," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 202-223.
  • Handle: RePEc:eee:intfin:v:27:y:2013:i:c:p:202-223
    DOI: 10.1016/j.intfin.2013.09.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Market quality; Limit order book; Transparency;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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