Should securities markets be transparent?

Market transparency lies at the heart of debate about floor versus automated trading systems, the informational advantages of market makers, and inter-market competition between trading systems. Since changes in transparency regimes are rare, analysis of each event becomes more crucial in our ability to evaluate prevailing theory accurately. We examine the natural experiment affected by the Toronto Stock Exchange when it publicly disseminated the limit order book on both the traditional floor and on its automated trading system. This change in transparency regime allows us to isolate the effects of increased transparency while controlling for stock-specific factors and for type (floor or automated) of trading system. We find that the increase in transparency reduces liquidity. In particular, execution costs and volatility increase after the limit order book is publicly displayed. We also show that the reduction in liquidity is associated with significant declines in stock prices.