The impact of reduced pre-trade transparency regimes on market quality
Authored by Giulia Iori, Polina Kovaleva
Date Published: 2015
DOI: 10.1016/j.jedc.2015.05.011
Sponsors:
European Union
Complexity Research Initiative for Systemic Instabilities (CRISIS)
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Mathematical description
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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. (C) 2015 Elsevier B.V. All rights reserved.
Tags
Liquidity
Order aggressiveness
Limit orders