Abstract
This paper analyses the effects of pre‐trade transparency on market quality in an experimental open limit order book preceded by a market for information. The design of the trading game is akin to the system in use in an increasing number of financial markets. We find that the disclosure of traders’ identities reduces the incentive to acquire information, liquidity and volatility. We also show that a positive relation exists between the proportion of traders buying information and liquidity. The results are consistent with a standard model of price formation where the number of informed traders is endogenous.
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