Transparency and liquidity in securities markets*

This paper provides a framework which deals with various types of transparency concerning the composition of order flow. Using this framework, we study the relationship between transparency and price volatility as a measure of liquidity. We derive conditions under which increasing transparency reduces price volatility, demonstrating that increased transparency does not always imply less volatility. * The views expressed herein are those of the author. They do not reflect those of the Bank of Japan. Market transparency is defined as “the ability of market participants to observe the information on the trading process ” by O’Hara (1995). Transparency has many dimensions because a market has many kinds of participants and many types of information. In this paper, we focus on a special type of transparency that concerns the composition of order flow