Credit disclosure of the limit order
The empirical evidence on the effects of transparency, obtained both with field data and experimental works, is also mixed.1 Madhavan, Porter and Weaver (2005) found that execution costs and volatility increased on the Toronto Stock Exchange when the real-time information on the limit order book was made public; Boehmer, Saar and Yu (2005), instead, reported the results of the OpenBook experiment conducted by the NYSE in January 2002, showing that when traders were allowed to observe the depth of the NYSE book in real time, execution costs decreased. We now tackle these topics with the help of the models developed in previous articles, so that we can present the recent contributions to the discussion of transparency. As evidence show, to model transparency it is necessary to specify what information can be obtained ex ante and who can get it. Recall from Figure 1.3 that information can involve order size and direction as well as traders’ identity. Recall also that this information may involve all market participants or only some. Admati and Pfleiderer (1991) analyse the case in which the pre-announcement of orders reveals information on their size and the type of agent making the announcement. Röell (1990) discusses the case of dual trading, where the information on order size and agent type is accessible only to some intermediaries, and Foster and George (1992) and Madhavan (1996) discuss transparency in financial markets more generally. More recent contributions (Foucault, Moinas and Theissen, 2007; Rindi, 2008) take into account the role of market structure and show how greatly the effects of transparency on market quality can differ, depending on the type of information released. For instance, disclosure of the limit order book generally increases liquidity, whereas that of traders’ identities may reduce it.