Trade disclosure and price dispersion

Abstract

This paper studies the implications of trade reporting in a two-stage trade model similar to Journal of Financial Economics 14, 71–100. We find that the degree of market transparency has important effects on market equilibria. In particular, we show that dealers operating in a transparent structure set regret-free prices at each period. In contrast, dealers in an opaque market invest in acquiring information at the beginning of the trading day. Moreover, we show that in equilibrium there is price dispersion in the opaque market, whereas this is not the case if orders are reported. Additionally, we show that trade disclosure increases the informational efficiency of transaction prices and reduces volatility. Finally, concerning the welfare of market participants, we obtain ambiguous results.