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Does Trading Anonymously Enhance Liquidity?

Published online by Cambridge University Press:  20 September 2019

Patrick J. Dennis  and
Patrik Sandås
Patrick J. Dennis
Affiliation:
Dennis, [email protected], University of Virginia McIntire School of Commerce
Patrik Sandås*
Affiliation:
Sandås, [email protected], University of Virginia McIntire School of Commerce
*
Sandås (corresponding author), [email protected]
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Abstract

Is liquidity better when a trade counterparty’s brokerage firm is unknown (anonymous) or known (transparent)? We examine a quasinatural experiment where some firms switched from transparent to anonymous trading and then, 1 year later, switched back. Our results for inside spread, price impact, and limit order book depth suggest that liquidity improves when anonymous post-trade reporting is introduced and liquidity worsens when anonymous post-trade reporting is reversed.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 7 , November 2020 , pp. 2372 - 2396
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

Sandås was a SIFR research affiliate and a Riksbanken visiting professor when most of this research was undertaken. We are grateful for financial support from the McIntire School of Commerce, Nasdaq Nordic, SIFR, Sveriges Riksbank, for comments from Petter Dahlström, Richard Evans, Anders Green, Björn Hagströmer, Björn Hertzberg, Matti Keloharju, Mika Koskinen, Marc Lipson, Raymond Liu, Timo Rothovious, Matti Suominen, Jared Stanfield, Andras Vajlok, and Xin Zhang, and seminar participants at Aalto University, Australian National University, City University of Hong Kong, Hong Kong Polytechnic University, Nasdaq Nordic Stockholm, Stockholm Business School, Sveriges Riksbank, University of Auckland, University of New South Wales, University of Virginia, and the 2017 Annual Meeting of the Midwest Finance Association.

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