Abstract
We use the introduction and the subsequent removal of the ash order facility (an actionable indication of interest, IOI) from Nasdaq as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We nd that ash orders signicantly improve liquidity in Nasdaq. In addition overall market quality improves substantially when the ash functionality is introduced and deteriorates when it is removed. One explanation for our ndings is that ash orders are placed by less informed traders and full their role as advertisement of uninformed liquidity needs. They successfully attract responses from liquidity providers immediately after the announcement is placed, thus lowering the risk bearing cost for the overall market. Our study is important in understanding the impact of voluntary disclosure, in guiding future market design choices, and in the current debate on dark pools and IOIs.
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