Due mainly to regulatory activity, financial market transparency has become the subject of much recent interest within the finance industry as well as in academic circles. The word ‘transparency’ is used in this context to mean how visible market activity and prices are. Regulation in this area is usually aimed at increasing transparency and regulatory intervention usually reflects a view that, when left unregulated, a sub-optimal level of transparency is chosen by Self Regulatory Organizations.
The term ‘increased transparency’ can be used to imply that prices and traded quantities are made observable to a wider audience than before. It may also mean that more sensitive details about trades are revealed, or that information is revealed more quickly than before.
Pre-trade transparency requires that customers and/or their agents have access to publicly observable ‘firm’ quotes at which they can expect to trade. Post-trade transparency concerns the dissemination of information about recently obtained prices (and could include information about quantity traded). Such information can assist investors in comparing the prices they obtained in their recent trades with that achieved by other investors and this kind of transparency can act as a motivation to agents acting on behalf of clients to provide what is known as ‘best execution’.
Perhaps of more fundamental importance however, is the fact that pre-trade, and particularly post-trade, transparency can have large effects on information asymmetry within the market, and can therefore change behavior of participants in ways that may, or may not, be beneficial to market quality. The main objection to excessive transparency comes from agents who provide liquidity to investors on-demand. These agents regard a degree of opacity as necessary for the safe unwinding of large unwanted positions. They argue that excessive transparency would raise the risks of providing liquidity on-demand and reduce the supply of liquidity services and therefore reduce the quality of the market.