Pre-Trade Transparency on the Italian Stock Exchange: A Trade Size Model on Panel Data

Abstract

The purpose of this study was to analyze the effects that have been caused by changes in pre-trade transparency upon the behavior of stock traders. We used a trade size model and tested it before, during and after the period when the Italian Stock Exchange introduced a 20-level order book with disaggregated orders. Tick by tick data of the whole set of stocks (up to 277) listed on the Italian Stock Exchange were studied through fixed-effects panel models, within intra day (every 30 minutes and 150 minutes) and daily time frames. Our results indicate that order flows, bidask spreads, levels of risk and some information events differentially affect trade sizes when investors receive better information prior to negotiation. Both (intra day) informed and uninformed traders operating in a more transparent market became more reticent, with reduced trades sizes and higher orders' cancellations. Moreover, it appears that the higher degree of order book disclosure permits traders to downsize their level of risk aversion; i.e. it reduces the 'uncertainty' that would otherwise result in disrupted trading activity under conditions of information opacity.JEL Classification: G14; D03; D82; C23; C82. Key words: pre-trade transparency; trade size; private information; panel data. * We are grateful to Investnet-IW Bank for providing us with the trading platform used to download the data set. We would like also to thank Roberto Golinelli for his useful comments and advice; Massimiliano Ghedini, Ivan Girotto and CINECA for providing a powerful HPC computer to deal the huge dimension of the dataset.