Does Trading Anonymously Enhance Liquidity?

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.

Voluntary pre-trade anonymity and market liquidity

“…The empirical financial literature has extensively analysed the effects of anonymity on market quality, and especially on market liquidity, based on the few events available. This strand of literature includes Theissen (2003), Comerton-Forde et al (2005), Frino et al (2008), Linnainmaa andSaar (2012), andComerton-Forde et al (2011), among others, and more recently Meling (2018) and Dennis and Sandås (2019). Most of the previous empirical evidence seems to support a positive effect of anonymity on market liquidity.…”

“…Anonymity, understood as the concealment of broker identity in the trading screen, has become a relevant issue to regulators, market participants and academics. The reason is that broker ID would provide insights about valuable characteristics of traders and could affect market quality, as stated, for example, in Frino et al (2010), Dennis and Sandås (2019), and Lepone et al (2012). In recent years, many exchanges around the world have chosen to conceal the broker ID in the trading process.…”

Voluntary Pre-Trade Anonymity and Market Liquidity

“…The empirical financial literature has extensively analysed the effects of anonymity on market quality, and especially on market liquidity, based on the few events available. This strand of literature includes Theissen (2003), Comerton-Forde et al (2005), Frino et al (2008), Linnainmaa andSaar (2012), andComerton-Forde et al (2011), among others, and more recently Meling (2018) and Dennis and Sandås (2019). Most of the previous empirical evidence seems to support a positive effect of anonymity on market liquidity.…”