Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE

Abstract

This paper investigates an important feature of market design: pre-trade transparency, defined as the availability of information about pending trading interest in the market. We look at how the NYSE’s introduction of OpenBook, which enables traders off the exchange floor to observe depth in the limit order book in real time, affects the trading strategies of investors and specialists, informational efficiency, liquidity, and returns. We find that traders attempt to manage the exposure of their limit orders: the cancellation rate increases, time-to-cancellation shortens, and smaller orders are submitted. The new information OpenBook provides seems to cause traders to prefer managing the trading process themselves, rather than delegating this task to floor brokers. We also show that specialists’ participation rate in trading decreases and the depth they add to the quote goes down, consistent with a loss of their informational advantage or with being "crowded out" by active limit order strategies. We detect an improvement in the informational efficiency of prices after the introduction of OpenBook. Greater pre-trade transparency leads to some improvement in displayed liquidity in the book and a reduction in the execution costs of trades. We find that cumulative abnormal returns are positive following the introduction of OpenBook, consistent with the view that improvement in liquidity affects stock returns.