Trading anonymity and order anticipation

Does it matter to market quality if broker identities are revealed after a trade and only to the two traders involved? We find that implementing full anonymity dramatically improves liquidity and reduces trader execution costs. To explain this, we compare theories based on asymmetric information to an order anticipation mechanism, where identity signals trader size, allowing strategic agents to predict the future order flow of large traders. Evidence supports the anticipation hypothesis: liquidity improves most in stocks where trading is heavily concentrated among a few brokers and in stocks susceptible to temporary price pressure. Also, only traders having large market shares benefit from anonymity