Article ID Journal Published Year Pages File Type
960915 Journal of Financial Markets 2016 25 Pages PDF
Abstract
I use experimental asset markets to analyze trading under different transparency and information settings. I find that both liquidity and informed traders use undisclosed orders to compete for liquidity provision. In opaque markets, traders increase aggressiveness to improve execution probability. Without information friction, market opacity enhances liquidity, especially toward the end of trading, and is beneficial for liquidity traders. Under informed trading, adverse selection drives market outcomes mainly around news announcements. Monopolistic insiders exploit opacity at the expense of large liquidity traders. Opacity does not affect informational efficiency with a monopolistic insider, but value discovery is faster when informational rents are shared.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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