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ECON0001 Week 5
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Week 5Market 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
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atMÉIiftp.bom ith.ee
1Twobuyorders
so thtv4 Onlyinformedinvestorsbuyinbothmarketssimultaneously
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2Onebuyonesell
maintormative
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m axspread informed
andnospreadtouninformed
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