Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-10T02:43:11.005Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Trading Anonymously Enhance Liquidity?

Published online by Cambridge University Press:  20 September 2019

Patrick J. Dennis  and
Patrik Sandås
Patrick J. Dennis
Affiliation:
Dennis, [email protected], University of Virginia McIntire School of Commerce
Patrik Sandås*
Affiliation:
Sandås, [email protected], University of Virginia McIntire School of Commerce
*
Sandås (corresponding author), [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Is liquidity better when a trade counterparty’s brokerage firm is unknown (anonymous) or known (transparent)? We examine a quasinatural experiment where some firms switched from transparent to anonymous trading and then, 1 year later, switched back. Our results for inside spread, price impact, and limit order book depth suggest that liquidity improves when anonymous post-trade reporting is introduced and liquidity worsens when anonymous post-trade reporting is reversed.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2372 - 2396
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Sandås was a SIFR research affiliate and a Riksbanken visiting professor when most of this research was undertaken. We are grateful for financial support from the McIntire School of Commerce, Nasdaq Nordic, SIFR, Sveriges Riksbank, for comments from Petter Dahlström, Richard Evans, Anders Green, Björn Hagströmer, Björn Hertzberg, Matti Keloharju, Mika Koskinen, Marc Lipson, Raymond Liu, Timo Rothovious, Matti Suominen, Jared Stanfield, Andras Vajlok, and Xin Zhang, and seminar participants at Aalto University, Australian National University, City University of Hong Kong, Hong Kong Polytechnic University, Nasdaq Nordic Stockholm, Stockholm Business School, Sveriges Riksbank, University of Auckland, University of New South Wales, University of Virginia, and the 2017 Annual Meeting of the Midwest Finance Association.

References

Bessembinder, H.; Maxwell, W.; and Venkataraman, K.. “Market Transparency, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds.” Journal of Financial Economics, 82 (2006), 251–288.10.1016/j.jfineco.2005.10.002CrossRefGoogle Scholar
Board, J., and Sutcliffe, C.. “The Proof of the Pudding: The Effects of Increased Trade Transparency in the London Stock Exchange.” Journal of Business, Finance and Accounting, 27 (2000), 887–909.CrossRefGoogle Scholar
Buffa, A.“Insider Trade Disclosure, Market Efficiency, and Liquidity.” Working Paper, Boston University, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1102126 (2013).Google Scholar
Card, D., and Krueger, A. B.. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” The American Economic Review, 84 (1994), 772–793.Google Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Edwards, A. K.; Harris, L. E.; and Piwowar, M. S.. “Corporate Bond Market Transaction Costs and Transparency.” Journal of Finance, 62 (2007), 1421–1451.10.1111/j.1540-6261.2007.01240.xCrossRefGoogle Scholar
Ellis, K.; Michaely, R.; and O’Hara, M.. “The Making of a Dealer Market: From Entry to Equilibrium in the Trading of Nasdaq Stocks.” Journal of Finance, 57 (2002), 2289–2316.10.1111/1540-6261.00496CrossRefGoogle Scholar
Foucault, T.; Pagano, M.; and Röell, A.. Market Liquidity—Theory, Evidence and Policy, 1st ed.Oxford, NY: Oxford University Press (2013).10.1093/acprof:oso/9780199936243.001.0001CrossRefGoogle Scholar
Friederich, S., and Payne, R.. “Trading Anonymity and Order Anticipation.” Journal of Financial Markets, 21 (2014), 1–24.10.1016/j.finmar.2014.07.002CrossRefGoogle Scholar
Frino, A.; Johnstone, D.; and Zhang, H.. “Anonymity, Stealth Trading, and the Information Content of Broker Identity.” The Financial Review, 45 (2010), 501–522.10.1111/j.1540-6288.2010.00258.xCrossRefGoogle Scholar
Gemmill, G.“Transparency and Liquidity: A Study of Block Trades on London Stock Exchange under Different Publication Rules.” Journal of Finance, 51 (1996), 1765–1789.10.1111/j.1540-6261.1996.tb05225.xCrossRefGoogle Scholar
Goldstein, M. A.; Hotchkiss, E. S.; and Sirri, E. R.. “Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.” Review of Financial Studies, 20 (2007), 235–273.CrossRefGoogle Scholar
Hachmeister, A., and Schiereck, D.. “Dancing in the Dark: Post-Trade Anonymity, Liquidity and Informed Trading.” Review of Quantitative Finance and Accounting, 34 (2010), 145–177.10.1007/s11156-010-0165-4CrossRefGoogle Scholar
Harris, L. E.“Minimum Price Variations, Discrete Bid-Ask Spreads, and Quotation Sizes.” Review of Financial Studies, 7 (1994), 149–178.CrossRefGoogle Scholar
Imbens, G. W.“Nonparametric Estimation of Average Treatment Effects under Exogeneity: A Review.” Review of Economics and Statistics, 86 (2004), 4–29.10.1162/003465304323023651CrossRefGoogle Scholar
Lepone, A.; Segara, R.; and Wong, B.. “Does Broker Anonymity Hide Informed Traders? ” In Transparency and Governance in a Global World, Choi, J. J. and Sami, H., eds. Bingley, U.K.: Emerald (2012), 287–317.10.1108/S1569-3767(2012)0000013013CrossRefGoogle Scholar
Linnainmaa, J., and Saar, G.. “Lack of Anonymity and the Inference from Order Flow.” Review of Financial Studies, 25 (2012), 1414–1456.10.1093/rfs/hhs002CrossRefGoogle Scholar
Meling, T. G.“Anonymous Trading in Equities.” Working Paper, University of Bergen,  available  at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2656161 (2018).Google Scholar
Menkhoff, L., and Schmeling, M.. “Trader See, Trader Do: How Do (Small) FX Traders React to Large Counterparties’s Trades? ” Journal of International Money and Finance, 29 (2010), 1263–1302.10.1016/j.jimonfin.2010.04.001CrossRefGoogle Scholar
Pagano, M., and Röell, A.. “Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading.” Journal of Finance, 51 (1996), 579–611.10.1111/j.1540-6261.1996.tb02695.xCrossRefGoogle Scholar
Petersen, M.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.10.1093/rfs/hhn053CrossRefGoogle Scholar
Pham, T. P.; Swan, P.; and Westerholm, P. J.. “Intra-Day Revelation of Counterparty Identity in the World’s Best-Lit Market.” Working Paper, University of New South Wales (2015).CrossRefGoogle Scholar
Poskitt, R.; Marsden, A.; Nguyen, N.; and Shen, J.. “The Introduction of Broker Anonymity on the New Zealand Exchange.” Pacific Accounting Review, 23 (2011), 34–51.CrossRefGoogle Scholar
Rindi, B.“Informed Traders as Liquidity Providers: Anonymity, Liquidity and Price Formation.” Review of Finance, 12 (2008), 1–36.10.1093/rof/rfm023CrossRefGoogle Scholar
Rosenbaum, P. R., and Rubin, D. B.. “The Central Role of the Propensity Score in Observational Studies for Causal Effects.” Biometrika, 70 (1983), 41–55.CrossRefGoogle Scholar
Schultz, P.“Who Makes Markets.” Journal of Financial Markets, 6 (2003), 49–72.CrossRefGoogle Scholar
Simaan, Y.; Weaver, D.; and Whitcomb, D.. “Market Maker Quotation Behavior and Pretrade Transparency.” Journal of Finance, 58 (2003), 1247–1267.10.1111/1540-6261.00565CrossRefGoogle Scholar
Stuart, E. A., and Rubin, D. B.. Best Practices in Quasi-Experimental Designs. London: SAGE Publications (2008).Google Scholar
Supplementary material: File

Dennis and Sandås supplementary material

Dennis and Sandås supplementary material

Download Dennis and Sandås supplementary material(File)
File 143.8 KB