Information shares of two parallel currency options markets: Trading costs versus transparency/tradability

• The OTC options market has a greater information share than the TASE options market.
• Trading costs and investor type are more important to price discovery than market transparency/tradability.
• The time series of OTC information share is decreasing in its relative trading costs to the TASE.
• The OTC and TASE options markets are viewed as substitutes by informed traders.

This paper studies whether trading costs or transparency/tradability are more important to price discovery using a unique dataset of currency options that trade simultaneously in two parallel markets. The Over-The-Counter (OTC) market is characterized by sophisticated investors, low trading costs, and low transparency/tradability compared to the Tel-Aviv Stock Exchange (TASE). Pricing errors are much larger on the TASE and the information share of the OTC market is significantly larger than that of the TASE by various information share measures, showing that trading costs and trader type have a first-order effect on price discovery while transparency/tradability have a second-order effect.