(When) Does Transparency Reduce Liquidity?

The catchphrase “too much information” can be applied in many circumstances, personal and social, but not, surely, in relation to financial markets.

It has long been held that greater transparency, thus more information, can only increase the volume of trading and improve liquidity.

In conventional thinking, illiquid markets are an expression of the sort of information asymmetry that causes spreads to widen as traders seek protection against the possibility that their counter-parties know something that they do not. Transparency reduces such information asymmetry, thereby improving liquidity.

That indeed has been the accepted wisdom – until now.

Our findings suggest that … Read more