Twilight Falls on the Limit Order Book: Endogeneity and the Demise of Broker Identity

Maher, Owen; Swan, Peter L.; Westerholm, P. Joakim

doi:10.2139/ssrn.1090001

Cited by 6 publications

(15 citation statements)

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“…These studies provide strong evidence that the switch to anonymous trading on these exchanges has improved market liquidity. However, Maher et al (2008) argue that the regression analysis employed in these studies suffers from the endogeneity problem. They show that 2SLS yield the opposite finding, i.e.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

The introduction of broker anonymity on the New Zealand Exchange

Poskitt

Marsden²,

Nguyen³

et al. 2011

Pacific Accounting Review

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PurposeThe purpose of this paper is to examine the impact of the introduction of anonymous trading on the liquidity of New Zealand Stock Exchange (NZX)‐listed stocks.Design/methodology/approachThe paper examines the impact of the switch to anonymous trading on effective spreads and adverse selection costs using both univariate and multivariate approaches and data spanning a 240‐day event window period. The paper also compares the NZX's share of trading in cross‐listed stocks before and after the switch to anonymous trading to determine if the change in market architecture improved the NZX's competitiveness vis‐à‐vis the Australian Stock Exchange (ASX).FindingsThe paper finds that effective spreads and adverse selection costs increased following the switch to anonymous trading across the broad range of NZX50 stocks, consistent with an increase in information risk in the post‐event period. However, the paper also finds that the switch to anonymous trading improved the NZX's market share in trading in cross‐listed stocks vis‐à‐vis the ASX.Originality/valueThe results show that market liquidity deteriorates in a more opaque environment due to the greater information risk facing investors. This is in sharp contrast to prior research, which reports that similar changes in pre‐trade transparency on other exchanges have improved market liquidity. The results suggest that although institutional investors and the NZX itself might well have benefited from the switch to anonymous trading, liquidity demanders face higher transaction costs as a result.

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Section: Hypothesis Developmentmentioning

confidence: 99%

The introduction of broker anonymity on the New Zealand Exchange

Poskitt

Marsden²,

Nguyen³

et al. 2011

Pacific Accounting Review

View full text Add to dashboard Cite

show abstract

“…See, for example,Röell (1990),Admati and Pfleiderer (1991),Benveniste et al (1992),Foster and George (1992),Madhavan (1996),Frino, Johnstone, and Zhang (2005),Foucault, Moinas, and Theissen (2007),Boulatov and George (2008), andRindi (2008).4 See, for example, Comerton-Forde,Frino, and Mollica (2005),Foucault, Moinas, and Theissen (2007),Aspris, Frino, Gerace, and Lepone (2008),and Maher, Swan, and Westerholm (2008). While the first three papers find that increased anonymity improves liquidity, Maher et al claim that this result is sensitive to the econometric specification employed and could be completely reversed.…”

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confidence: 99%

Lack of Anonymity and the Inference from Order Flow

Linnainmaa

Saar

2012

Rev. Financ. Stud.

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This article investigates the information content of signals about the identity of investors and their role in price formation. Whereas we document that investors use multiple brokers, broker identity is nevertheless a powerful signal about the identity of investors who initiate trades. The market also correctly processes this signal: the permanent price impact of orders coming from different brokers fits the information profile of the investors associated with these brokers. Our results suggest that an increase in the degree of anonymity may render order flow less informative, which could explain why the literature has documented liquidity improvements in exchanges that reduce transparency. (JEL G12, G14, G28) The concept of anonymity in financial markets pertains to the information that market observers have about the identity of investors who submit orders. On the most basic level, anonymity relates to how informed investors exploit their informational advantage, and therefore the extent of anonymity affects adverse selection and the informational efficiency of prices. As markets around the world respond to competitive and regulatory pressures, features of market design, such as the rules governing disclosure of trader information (and transparency in general), receive considerable attention. Understanding how the building blocks of market design affect the strategies of traders, the evolution of prices, and the survival of competing execution venues is of great interest to a wide range of market participants and researchers. The extent of anonymity associated with distinct market structures can be measured along a spectrum: on one end are brokered upstairs markets in We are grateful for comments from an anonymous referee,

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“…Second, the event of interest -the introduction of Xetra BEST -occurred at the same time for all sample stocks. In such a setting it is difficult to appropriately control for other factors affecting liquidity (see Maher, Swan and Westerholm 2008). For these reasons we do not attempt to analyze whether the quality of the main market has changed upon introduction of Xetra BEST.…”

Section: Introductionmentioning

confidence: 99%