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Market Transparency, Market Quality and Sunshine Trading

  • Frutos, M. A. de
  • Manzano, Carolina

This paper analyzes the implications of pre-trade transpareny on market performance. We find that transparency increases the precision held by agents, however we show that this increase in precision may not be due to prices themselves. In competitive markets, transparency increases market liquidity and reduces price volatility, whereas these results may not hold under imperfect competition. More importantly, market depth and volatility might be positively related with proper priors. Moreover, we study the incentives for liquidity traders to engage in sunshine trading. We obtain that the choice of sunshine/dark trading for a noise trader is independent of his order size, being the traders with higher liquidity needs more interested in sunshine trading, as long as this practice is desirable. Key words: Market Microstructure, Transparency, Prior Information, Market Quality, Sunshine Trading

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File URL: http://hdl.handle.net/2072/211882
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Paper provided by Universitat Rovira i Virgili, Department of Economics in its series Working Papers with number 2072/211882.

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Date of creation: 2013
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Handle: RePEc:urv:wpaper:2072/211882
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  1. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 317-55, July.
  2. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-81.
  3. Thierry Foucault & Sophie Moinas & Erik Theissen, 2007. "Does Anonymity Matter in Electronic Limit Order Markets?," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1707-1747, 2007 28.
  4. Juhani T. Linnainmaa & Gideon Saar, 2012. "Lack of Anonymity and the Inference from Order Flow," Review of Financial Studies, Society for Financial Studies, vol. 25(5), pages 1414-1456.
  5. 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.
  6. Madhavan, Ananth & Porter, David & Weaver, Daniel, 2005. "Should securities markets be transparent?," Journal of Financial Markets, Elsevier, vol. 8(3), pages 265-287, August.
  7. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  8. Madhavan, Ananth, 1996. "Security Prices and Market Transparency," Journal of Financial Intermediation, Elsevier, vol. 5(3), pages 255-283, July.
  9. Huddart, Steven & Hughes, John S & Levine, Carolyn B, 2001. "Public Disclosure and Dissimulation of Insider Trades," Econometrica, Econometric Society, vol. 69(3), pages 665-81, May.
  10. Barbara Rindi, 2008. "Informed Traders as Liquidity Providers: Anonymity, Liquidity and Price Formation," Review of Finance, European Finance Association, vol. 12(3), pages 497-532.
  11. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
  12. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  13. 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.
  14. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  15. Naik, Narayan Y & Neuberger, Anthony & Viswanathan, S, 1999. "Trade Disclosure Regulations in Markets with Negotiated Trades," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 873-900.
  16. Magueye Dia & Sébastien Pouget, 2011. "Sunshine trading in an African stock market," Managerial Finance, Emerald Group Publishing, vol. 37(3), pages 257-274, March.
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