Who Wins and Who Loses in Transparent Markets? Daily and Intraday Analysis of Taiwan Stock Market

Abstract

This paper provides evidence regarding the welfare effect of pre-trade transparency according to investor and order type. In order to appreciate the manner in which welfare varies with market transparency, it is necessary to examine investors’ behavioral adjustments (aggressiveness and order size adjustments) with respect to market transparency. We find that both individual and institutional investors are more willing to supply liquidity following the enhancement of market transparency. Although individual investors behave more aggressively and submit larger orders when they supply and demand liquidity, institutional investors are relatively more conservative and submit smaller orders in an open environment. The welfare of investors is measured in terms of implementation shortfall, which is the weighted average of price impacts and opportunity costs. Our main conclusion is that both institutional and individual investors, but especially institutional investors, who demand immediacy benefit from pre-trade transparency; however, individual investors who supply liquidity lose on account of pre-trade transparency. Further, intraday analysis indicates that although transparency enhancement is most detrimental for individual investors providing liquidity during the period approaching market close, it is most beneficial for institutional and individual investors demanding liquidity during the period approaching the close of markets.