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  5. Optimal Transparency in Over-the-Counter Markets

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Optimal Transparency in Over-the-Counter Markets

  • Piotr Dworczak
  • Maren Vairo
American Economic Review (Forthcoming)

Abstract

Financial over-the-counter markets often lack both pre-trade transparency (visibility of current quotes) and post-trade transparency (disclosure of past trades), which raises concerns about their efficiency. We propose a dynamic trading model with adverse selection to study both forms of transparency. We find that post-trade transparency improves welfare relative to the opaque market but is dominated by pre-trade transparency; moreover, in markets that are already pre-trade transparent, introducing post-trade transparency does not generate further gains and can sometimes reduce welfare. To test the robustness of these conclusions, we use a mechanism-design approach to characterize the optimal trading mechanism in our framework.

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