FIN-03-002 |
NYU Stern School of Business |
March 2003
Ekkehart Boehmer, Gideon Saar, and Lei Yu
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.
Ekkehart Boehmer
Institution: Research Division of the New York Stock Exchange, 11 Wall Street, New York,
NY 10005
Phone: (212) 656-5486
Email: eboehmer@nyse.com
Gideon Saar
Institution: Leonard N. Stern School of Business, New York University
Telephone: 212-998-0318
Fax: 212-995-4233
Email: gsaar@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~gsaar
Lei Yu
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0321
Email: lyu@stern.nyu.edu
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