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

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.

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File URL: http://eprints.utas.edu.au/17210/1/2013-12_Japan_Transparency_JULY_2013_Last.pdf
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Paper provided by University of Tasmania, Tasmanian School of Business and Economics in its series Working Papers with number 17210.

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Length: 44 pages
Date of creation: 16 Oct 2013
Date of revision: 16 Oct 2013
Publication status: Published by the University of Tasmania. Discussion paper 2013-12
Handle: RePEc:tas:wpaper:17210
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  1. Madhavan, A., 1991. "Security Prices and Market Transparency," Weiss Center Working Papers 1-92, Wharton School - Weiss Center for International Financial Research.
  2. Thierry Foucault & Albert J. Menkveld, 2008. "Competition for Order Flow and Smart Order Routing Systems," Post-Print hal-00459801, HAL.
  3. Torben G. Andersen & Tim Bollerslev, 1996. "Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long-Run in High Frequency Returns," NBER Working Papers 5752, National Bureau of Economic Research, Inc.
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  7. Duong, Huu Nhan & Kalev, Petko S. & Krishnamurti, Chandrasekhar, 2009. "Order aggressiveness of institutional and individual investors," Pacific-Basin Finance Journal, Elsevier, vol. 17(5), pages 533-546, November.
  8. Fishman, Michael J & Hagerty, Kathleen M, 1995. "The Mandatory Disclosure of Trades and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 637-76.
  9. Eom, Kyong Shik & Ok, Jinho & Park, Jong-Ho, 2007. "Pre-trade transparency and market quality," Journal of Financial Markets, Elsevier, vol. 10(4), pages 319-341, November.
  10. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range-Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, 06.
  11. Rindi, Barbara, 2002. "Transparency, Liquidity and Price Formation," Royal Economic Society Annual Conference 2002 159, Royal Economic Society.
  12. Terrence Hendershott & Charles M. Jones, 2005. "Island Goes Dark: Transparency, Fragmentation, and Regulation," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 743-793.
  13. Comerton-Forde, Carole & Frino, Alex & Mollica, Vito, 2005. "The impact of limit order anonymity on liquidity: Evidence from Paris, Tokyo and Korea," Journal of Economics and Business, Elsevier, vol. 57(6), pages 528-540.
  14. Yusif Simaan & Daniel G. Weaver & David K. Whitcomb, 2003. "Market Maker Quotation Behavior and Pretrade Transparency," Journal of Finance, American Finance Association, vol. 58(3), pages 1247-1268, 06.
  15. Ekkehart Boehmer & Gideon Saar & Lei Yu, 2005. "Lifting the Veil: An Analysis of Pre-trade Transparency at the NYSE," Journal of Finance, American Finance Association, vol. 60(2), pages 783-815, 04.
  16. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.
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