Market Microstructure in Emerging and Developed Markets

CHAPTER 19

Pretrade and Posttrade Transparency

STEPHEN G. SAPP

Associate Professor of Finance, University of Western Ontario

INGRID LO

Assistant Professor of Finance, Chinese University of Hong Kong and the Bank of Canada

INTRODUCTION

Since the global financial crisis started in 2007, academics, practitioners, and regulators have expressed much interest in understanding how to improve the operation of financial markets. Given the lack of transparency in trading financial securities is a factor often associated with the financial crisis, understanding the factors that influence market participants' trading decisions is important. Although traders have increasing access to real-time information on market prices and news from around the world, Bouchaud, Mezard, and Potters (2002, p. 251) note that traders have “the ultimate microscopic level of description.” The availability of information about trading activities is less transparent. Informed traders want to keep information on their trades more opaque to protect the value of their information, so exchanges recognizing the importance of these traders have different rules about how much information to provide on the size and timing of trades, as well as the identity of the counterparties. These issues show the importance of this topic to academics, investors, and regulators.

This chapter addresses several questions: What information do traders use? What information would traders like to have? How does the availability of different ...