Three essays on securities market transparency and design

Abstract

This dissertation focuses on exogenous regulatory changes, which allow us to provide quantitative causal evidence on the impact of pre-and post-trade transparency and alternative order books on market quality. First, we study how increasing informational asymmetry due to declining broker ID disclosure affects market liquidity for individual and institutional investors and their trading behaviour at the trading level and on an order level, respectively. We investigate three unique policy changes regarding broker ID disclosure conducted on the Helsinki stock market. We find that transaction costs overall improve with an enhanced level of information disclosure. The reintroduction of ex-post broker identities improved transaction costs by over 36.8bps at market level and 15.6bps for buyer-initiated orders. Overall market volume declined by 0.1% when ex-post broker identities were removed and increased by 0.02% when ex-post identities were reintroduced.

Second, we explore how trading via systematic internaliser (SI), investment firms dealing on their own account outside a regulated market and are a counterparty, not a trading venue, relates to overall market quality. We are the first to provide quantitative causal results, showing that on an aggregate level, SI trading, driven by limit-order SI trading, seems to improve market quality by enhancing competition in the limit order book. Limit-order SI trading lowers transaction costs significantly. Autocorrelation and variance-ratio improve at a highly significant level. The findings are essential to evaluate SI trading on a quantitative basis, allowing regulators to evaluate decisions and provide a foundation for future discussions on internalised trading.

Last, we examine the level of informed trading in SI and periodic call auction trading and how it drives price discovery on the lit trading venues. Both forms of trading offer less pre-trade transparency than the central-limit-order book but are much more transparent than dark pools. Literature has yet failed to quantify how those forms of trading contribute to price discovery. We show the level of informed trading depends on the liquidity of the individual security. For constituents of the FTSE 100 index, periodic auction trading is the most informed form of trading after CLOB trading, whereas SI limit-order trading is the least informative.