Asymmetric Information, Broker Identities and Market Quality: Evidence from the Australian Securities Exchange

Abstract

Investigating the market quality effects of the removal of broker identities from the limit order book at the Australian Securities Exchange (ASX), we find that more asymmetric information and less transparency is harmful to the liquidity of the smallest stocks by market capitalization while spreads fall for large stocks. We offer a different explanation than previous the literature for these outcomes: studies supporting opacity investigate the change from a partial transparent market to full opaque market, while studies supporting transparency examine the change from full opaque to a full transparent market. Effective spreads decreased in the ASX as a result of the disappearance of search cost, while studies that examine markets that go to full public display of limit order book tend to find improvements in liquidity. Our results document increases in volatility for large stocks after the anonymization of broker IDs while volatility falls for small stocks. Volume falls for all stocks sizes with large stocks impacted the most. Our study suggests that large and liquid stocks are more responsive to market design, and hence their trading volumes are more sensitive than for small stocks. As a result small companies benefits from decreased asymmetric information acquisition by allowing access to broker IDs to the public in these market segments.