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Does Market Transparency Matter? a Case Study

  • Antonio Scalia


    (Banca d'Italia)

  • Valerio Vacca


    (Banca d'Italia)

We analyse a change in the degree of transparency of MTS, the electronic inter-dealer market for Italian Government bonds, namely the July 1997 move to the anonymity of quotes. Our evidence supports the hypothesis that a decrease in transparency makes liquidity traders worse-off, whereas large/informed traders find it less costly to execute block trades. The evidence is also consistent with the �waiting game� hypothesis of Foster and Viswanathan (1996): under anonymity, traders tend to delay their trades in an attempt to acquire information through the order flow. From a public welfare perspective, our results indicate that the move to anonymity has been accompanied by an increase in market liquidity and by a reduction in volatility, a phenomenon that is also partly explained by the growth in Italy�s prospects for early participation in the EMU. The speed of information aggregation on MTS increases, as shown by an improvement of the MTS lead over the futures market. In a European perspective, the current organisation and performance of MTS place the market in a competitive position with respect to other sovereign bond markets and may contribute to their integration under the single currency.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 359.

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Date of creation: Oct 1999
Date of revision:
Handle: RePEc:bdi:wptemi:td_359_99
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  1. Sanford J. Grossman, 1987. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," NBER Working Papers 2357, National Bureau of Economic Research, Inc.
  2. Lyons, Richard K., 1995. "Tests of microstructural hypotheses in the foreign exchange market," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 321-351.
  3. Scalia, Antonio, 1998. "Information transmission and causality in the Italian Treasury bond market," Journal of Empirical Finance, Elsevier, vol. 5(4), pages 361-384, October.
  4. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March.
  5. Domowitz, Ian, 1990. "The mechanics of automated trade execution systems," Journal of Financial Intermediation, Elsevier, vol. 1(2), pages 167-194, June.
  6. Peter Dattels, 1995. "The Microstructure of Government Securities Markets," IMF Working Papers 95/117, International Monetary Fund.
  7. Forster, Margaret M. & George, Thomas J., 1992. "Anonymity in securities markets," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 168-206, June.
  8. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  9. Michael J. Fleming & Eli M. Remolona, 1997. "Price formation and liquidity in the U.S. Treasury market: evidence from intraday patterns around announcements," Staff Reports 27, Federal Reserve Bank of New York.
  10. Foster, F Douglas & Viswanathan, S, 1996. " Strategic Trading When Agents Forecast the Forecasts of Others," Journal of Finance, American Finance Association, vol. 51(4), pages 1437-78, September.
  11. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  12. Julian Franks & Stephen Schaefer, 1995. "Equity Market Transparency On The London Stock Exchange," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 70-78.
  13. Robert N. McCauley & William R. White, 1997. "The Euro and European financial markets," BIS Working Papers 41, Bank for International Settlements.
  14. Madhavan, Ananth, 1995. "Consolidation, Fragmentation, and the Disclosure of Trading Information," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 579-603.
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