City Research Online

Abstract

Lack of market transparency can impair the liquidity provision of non-standard liquidity suppliers and make liquidity demand increasing in illiquidity. This can yield strategic complementarities and induce multiple equilibria. Then an initial dearth of liquidity may degenerate into a liquidity rout (as in a “flash crash”) and traders faced with the largest cost of trading are those trading more intensely at equilibrium. An increase in order flow transparency and/or in the mass of dealers who are in the market at all times has a positive impact on total welfare.

Publication Type:	Article
Additional Information:	Copyright American Economic Association; reproduced with permission.
Publisher Keywords:	Liquidity fragility, flash crash, strategic complementarity, order flow transparency
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Faculty of Finance
SWORD Depositor:	Symplectic Administrator

Export

Downloads