On the Role of Transparency in the ABS Secondary Market

Abstract

As a consequence of the subprime crisis, a debate about the convenience of transparency enhancement in financial markets has been put forward by the securities regulators. In this paper, it is shown that under transparency, on the one hand, market makers' bid-ask spreads are lower and depth is higher in the ABS secondary market. On the other hand, the lower bid-ask spreads enjoyed by market makers reduces the number of market makers. However, introducing transparency in this market is social-welfare improving, providing the costs of implementing it are not excessively high (it could be necessary to create an information platform to spread information) and the remaining market makers buy and sell all types of ABS bonds: RMBS, CMBS, CDO, etc. This last condition guarantees that competition among market makers is kept at the same level as under an opaque ABS secondary market.