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Subscribing to Transparency

Author

Listed:
  • He, Yinghua
  • Nielsson, Ulf
  • Guo, Hong
  • Yang, Jiong

Abstract

The paper empirically explores how more trade transparency affects market liquidity. The analysis takes advantage of a unique setting in which the Shanghai Stock Exchange offered more trade transparency to market participants subscribing to a new software package. First, the results show that the additional data disclosure increased trading activity, but also increased transactions costs through wider bid-ask spreads. Thus, in contrast to popular policy belief, the paper finds that more transparency need not improve market liquidity. Second, the paper finds a particularly strong immediate liquidity impact accompanied by altered trading behavior, which suggests a significant impact on institutional traders subscribing relatively early. Lastly, since the effective level of market transparency is bound to depend on how many traders are subscribing to the data, the study can empirically establish the functional form between market-wide transparency and liquidity. The relationship is non-monotonic, which can explain the lack of consensus in the existing literature where each empirical study is naturally confined to specific parts of the transparency domain.

Suggested Citation

  • He, Yinghua & Nielsson, Ulf & Guo, Hong & Yang, Jiong, 2012. "Subscribing to Transparency," TSE Working Papers 12-351, Toulouse School of Economics (TSE), revised Nov 2013.
  • Handle: RePEc:tse:wpaper:26441
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    References listed on IDEAS

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    Cited by:

    1. Mouwen, Arnoud, 2015. "Drivers of customer satisfaction with public transport services," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 1-20.

    More about this item

    Keywords

    transparency; liquidity; market microstructure; market design;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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