Lifting the Veil: An Analysis of Pre-Trade Transparency at the Nyse

We study pre-trade transparency by looking at the introduction of NYSE’s OpenBook service that provides limit-order book information to traders off the exchange floor. We find that traders attempt to manage limit-order exposure: They submit smaller orders and cancel orders faster. Specialists’ participation rate and the depth they add to the quote decline. Liquidity increases in that the price impact of orders declines, and we find some improvement in the informational efficiency of prices. These results suggest that an increase in pre-trade transparency affects investors’ trading strategies and can improve certain dimensions of market quality. THE PROLIFERATION OF NEW EXCHANGES and trading platforms in the United States and abroad brings to the forefront many issues in market design. Should a market have at its core an electronic limit-order book? What possible roles can market makers play? What information should market participants observe about order flow and prices? These issues have implications for investor trading strategies, specialist behavior, market liquidity, the informational efficiency of prices, and ultimately for investor welfare. We investigate a key feature of market design: transparency, or the ability of market participants to observe information in the trading process. Our focus is on a particular form of transparency: the ability of market participants to observe the pending trading interests of other participants, or in other words, the content of the limit-order book. Knowledge about buying and selling interest can be used both to refine one’s inference about the value of a