Week 5
Market transparency
FPR Ch8
Model
De nitions
Pre trade transparency: the degree of observability of order information prior to execution
Post trade transparency: the degree of observability of completed trade information
Set up
Suppose that the same security is traded in two distinct markets:
• OTC: the same bond may be available from di erent dealers
• Equity: due to trading fragmentation, the same security is traded in di erent venues
Use the Glosten and Milgrom framework to investigate how the observability of order ow
information across dealers/venues impacts
• Uninformed investors trading costs
• Price discovery
Under G and M assumptions:
• Pr( two risk neutral informed traders in the market who can only hit one of the two venues)= IT
• Pr( two uninformed traders, one who buys and one who sells)= 1 IT
vv buybuy
2informed Dealersineachmarket
pretradetransparency
observe
traders
on theorderinparallelmarket
Ver sellsell
1it
2uninformed buysell
traders
Markets
TRANSPARENTMARKET
atMÉIiftp.bom ith.ee
1Twobuyorders
so thtv4 Onlyinformedinvestorsbuyinbothmarketssimultaneously
EMBB r sat
Dealers'anprice
discriminate
2Onebuyonesell
maintormative
charging to
m axspread informed
andnospreadtouninformed
Elutes u satb'm
4Th
Twosell
orders
Nat I v13.13
btECull.tl
Market transparency
FPR Ch8
Model
De nitions
Pre trade transparency: the degree of observability of order information prior to execution
Post trade transparency: the degree of observability of completed trade information
Set up
Suppose that the same security is traded in two distinct markets:
• OTC: the same bond may be available from di erent dealers
• Equity: due to trading fragmentation, the same security is traded in di erent venues
Use the Glosten and Milgrom framework to investigate how the observability of order ow
information across dealers/venues impacts
• Uninformed investors trading costs
• Price discovery
Under G and M assumptions:
• Pr( two risk neutral informed traders in the market who can only hit one of the two venues)= IT
• Pr( two uninformed traders, one who buys and one who sells)= 1 IT
vv buybuy
2informed Dealersineachmarket
pretradetransparency
observe
traders
on theorderinparallelmarket
Ver sellsell
1it
2uninformed buysell
traders
Markets
TRANSPARENTMARKET
atMÉIiftp.bom ith.ee
1Twobuyorders
so thtv4 Onlyinformedinvestorsbuyinbothmarketssimultaneously
EMBB r sat
Dealers'anprice
discriminate
2Onebuyonesell
maintormative
charging to
m axspread informed
andnospreadtouninformed
Elutes u satb'm
4Th
Twosell
orders
Nat I v13.13
btECull.tl
