Pre-Trade Transparency and Trade Size
29 Pages Posted: 4 Nov 2010 Last revised: 19 Aug 2012
Date Written: November 4, 2010
We analyze how pre-trade transparency (PTT) affects the behavior of different stock traders. To do so, we exploit a natural experiment, that is the PTT change in the equity segment of Italian Stock Exchange which occurred in July 2007, with the aim of reducing information asymmetries between individuals and intermediaries/institutional investors. We specify a dynamic empirical model for trade size and estimate it on a large panel of tick-by-tick data. Results suggest that increased transparency affects the dynamic trade pattern emerging from interacting strategic decisions of different traders. In addition, the contribution of the order flow disclosure both in reducing the adverse selection component of the bid-ask spread, and in weakening the sensitiveness to risk of the trade size also emerges. Overall, PTT enhancement should reduce the informative disequilibrium among market participants and improve the quality of the market.
Keywords: pre-trade transparency, trade size, private information, panel data
JEL Classification: G14, D03, D82, C23, C82
Suggested Citation: Suggested Citation