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The Impact of Reduced Pre-Trade Transparency Regimes on Market Quality

Kovaleva, P. and Iori, G. (2015). The Impact of Reduced Pre-Trade Transparency Regimes on Market Quality. Journal of Economic Dynamics & Control, 57, pp. 145-162. doi: 10.1016/j.jedc.2015.05.011

Abstract

This paper studies the effects of pre-trade quote transparency on spread, price discovery and liquidity in an artificial limit order market with heterogeneous trading rules. Our agent-based numerical experiments suggest that full quote transparency incurs substantial transaction costs to traders and dampens trading activity in an order-driven market. Our finding reveals that exogenous restriction of displayed depth, up to several best quotes, does not benefit market performance. On the contrary, endogenous restriction of displayed quote depth, by means of iceberg orders, improves market quality in multiple dimensions: it reduces average transaction costs, maintains higher liquidity and moderate volatility, balances the limit order book, and enhances price discovery.

Publication Type: Article
Additional Information: © 2015, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Agent based models; Market transparency; Iceberg orders; Liquidity; Bid-ask spread
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/12355
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