Transparency (market)

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In economics, a market is transparent if much is known by many about: What products and services or capital assets are available, market depth (quantity available), what price, and where. Transparency is important since it is one of the theoretical conditions required for a free market to be efficient. Price transparency can, however, lead to higher prices. For example, if it makes sellers reluctant to give steep discounts to certain buyers (e.g. disrupting price dispersion among buyers), or if it facilitates collusion, and price volatility is another concern. [1] A high degree of market transparency can result in disintermediation due to the buyer's increased knowledge of supply pricing.

Contents

There are two types of price transparency: 1) I know what price will be charged to me, and 2) I know what price will be charged to you. The two types of price transparency have different implications for differential pricing. [2] A transparent market should also provide necessary information about quality and other product features, [3] although quality can be exceedingly difficult to estimate for some goods, such as artworks. [4]

While the stock market is relatively transparent, hedge funds are notoriously secretive. Researchers in this area have found concerns by hedge funds about the crowding out of their trades through transparency and undesirable effects of incomplete transparency. [5] Some financial professionals, including Wall Street veteran Jeremy Frommer are pioneering the application of transparency to hedge funds by broadcasting live from trading desks and posting detailed portfolios online.[ citation needed ]

In the United States, the goal of the Corporate Transparency Act (CTA) is to foster greater transparency in business ownership within the United States. By mandating companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the CTA aims to curb illicit financial activities such as money laundering and terrorist financing.[ citation needed ] This requirement seeks to enhance accountability and deter the misuse of anonymous shell corporations for unlawful purposes. Ultimately, the CTA seeks to promote integrity in corporate governance and bolster confidence in the U.S. financial system by ensuring that the true individuals behind corporate entities are known and accountable.[ citation needed ]

Critical transparency

There is a rich literature in accounting that takes a critical perspective to market transparency, focusing on the nuances and boundaries. [6] [7] For example, some researchers question its utility (e.g. Etzioni [8] ). This also connects to the performativity of quantitative models [9] or "reactivity". [10] Specific cases include transparency in the art market. [11] There are also studies from finance that note concerns with market transparency, such as perverse effects including decreased market liquidity and increased price volatility. [1] This is one motivation for markets that are selectively transparent, such as "dark pools". [12]

Dynamics of transparency may also differ between investment markets, cambist markets where goods trade without being used up, [13] [14] and other types of markets, e.g. goods and services.

In fair value accounting (FVA), transparency may be complicated by the fact that level 2 and 3 assets cannot strictly be marked-to-market, given that no direct market exists, creating questions about what transparency means for these assets. Level 2 assets may be marked-to-model, a topic of interest in the social studies of finance, [15] [9] while Level 3 assets may require inputs including management expectations or assumptions.

In the Forex market

There are few markets that require the level of privacy, honesty, and trust between its participants as the Forex (FX) market. This creates great obstacles for traders, investors, and institutions to overcome as there is a lack of transparency, leading to the need to develop trust with trading partners and developing these relationships through social means, such as "gifts of information", which is even seen on the trading floors of global investment banks that service institutional investors. [13]

With little to no transparency, trader's ability to verify transactions becomes virtually impossible, at least if one does not have faith that the market exchange is operating in a well-run fashion, a problem that is unlikely with the major brokerage services open to institutional investors (e.g. Reuters, Bloomberg, and Telerate). In a situation with a problematic market exchange lacking transparency, there would be no trust between the client and the broker, yet surprisingly, there is nonetheless demand to trade in dark pools. [12] This has also become an area of financial innovation.

Forex markets are now also a target for new blockchain innovations, which would allow trading outside of centralized exchanges or change the way these exchanges operate. [16] [17]

See also

Related Research Articles

In economics and finance, arbitrage is the practice of taking advantage of a difference in prices in two or more markets – striking a combination of matching deals to capitalize on the difference, the profit being the difference between the market prices at which the unit is traded. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For example, an arbitrage opportunity is present when there is the possibility to instantaneously buy something for a low price and sell it for a higher price.

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, currency, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

Finance refers to monetary resources and to the study and discipline of money, currency, assets and liabilities. As a subject of study, it is related to but distinct from economics, which is the study of the production, distribution, and consumption of goods and services. Based on the scope of financial activities in financial systems, the discipline can be divided into personal, corporate, and public finance.

<span class="mw-page-title-main">Speculation</span> Engaging in risky financial transactions

In finance, speculation is the purchase of an asset with the hope that it will become more valuable shortly. It can also refer to short sales in which the speculator hopes for a decline in value.

Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most commonly used types of market risk are:

A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, many types of over-the-counter and derivative products, and futures contracts.

<span class="mw-page-title-main">Foreign exchange market</span> Global decentralized trading of international currencies

The foreign exchange market is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market.

A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, mergers & acquisitions, or to expand business. It is a longer-term debt instrument indicating that a corporation has borrowed a certain amount of money and promises to repay it in the future under specific terms. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.

In finance, a contract for difference (CFD) is a financial agreement between two parties, commonly referred to as the "buyer" and the "seller." The contract stipulates that the buyer will pay the seller the difference between the current value of an asset and its value at the time the contract was initiated. If the asset's price increases from the opening to the closing of the contract, the seller compensates the buyer for the increase, which constitutes the buyer's profit. Conversely, if the asset's price decreases, the buyer compensates the seller, resulting in a profit for the seller.

Fixed-income arbitrage is a group of market-neutral-investment strategies that are designed to take advantage of differences in interest rates between varying fixed-income securities or contracts. Arbitrage in terms of investment strategy, involves buying securities on one market for immediate resale on another market in order to profit from a price discrepancy.

<span class="mw-page-title-main">Stock trader</span> Person or company involved in trading equity securities

A stock trader or equity trader or share trader, also called a stock investor, is a person or company involved in trading equity securities and attempting to profit from the purchase and sale of those securities. Stock traders may be an investor, agent, hedger, arbitrageur, speculator, or stockbroker. Such equity trading in large publicly traded companies may be through a stock exchange. Stock shares in smaller public companies may be bought and sold in over-the-counter (OTC) markets or in some instances in equity crowdfunding platforms.

<span class="mw-page-title-main">Market sentiment</span> General attitude of investors to market price development

Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events. If investors expect upward price movement in the stock market, the sentiment is said to be bullish. On the contrary, if the market sentiment is bearish, most investors expect downward price movement. Market participants who maintain a static sentiment, regardless of market conditions, are described as permabulls and permabears respectively. Market sentiment is usually considered as a contrarian indicator: what most people expect is a good thing to bet against. Market sentiment is used because it is believed to be a good predictor of market moves, especially when it is more extreme. Very bearish sentiment is usually followed by the market going up more than normal, and vice versa. A bull market refers to a sustained period of either realized or expected price rises, whereas a bear market is used to describe when an index or stock has fallen 20% or more from a recent high for a sustained length of time.

Foreign exchange fraud is any trading scheme used to defraud traders by convincing them that they can expect to gain a high profit by trading in the foreign exchange market. Currency trading became a common form of fraud in early 2008, according to Michael Dunn of the U.S. Commodity Futures Trading Commission.

The following outline is provided as an overview of and topical guide to finance:

Linda Bradford Raschke (/'ræʃki/) is an American financier, operating mostly as a commodities and futures trader.

Market microstructure is a branch of finance concerned with the details of how exchange occurs in markets. While the theory of market microstructure applies to the exchange of real or financial assets, more evidence is available on the microstructure in the financial field due to the availability of transactions data from them. The major thrust of market microstructure research examines the ways in which the working processes of a market affect determinants of transaction costs, prices, quotes, volume, and trading behavior. In the twenty-first century, innovations have allowed an expansion into the study of the impact of market microstructure on the incidence of market abuse, such as insider trading, market manipulation and broker-client conflict.

<span class="mw-page-title-main">Matchbook FX</span>

Matchbook FX was an internet-based electronic communication network for trading currency online in the Spot-FX or foreign exchange market. It operated between 1999 and 2002.

A commodity trading advisor (CTA) is US financial regulatory term for an individual or organization who is retained by a fund or individual client to provide advice and services related to trading in futures contracts, commodity options and/or swaps. They are responsible for the trading within managed futures accounts. The definition of CTA may also apply to investment advisors for hedge funds and private funds including mutual funds and exchange-traded funds in certain cases. CTAs are generally regulated by the United States federal government through registration with the Commodity Futures Trading Commission (CFTC) and membership of the National Futures Association (NFA).

Decentralized finance provides financial instruments and services through smart contracts on a programmable, permissionless blockchain. This approach reduces the need for intermediaries such as brokerages, exchanges, or banks. DeFi platforms enable users to lend or borrow funds, speculate on asset price movements using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. The DeFi ecosystem is built on a layered architecture and highly composable building blocks. While some applications offer high interest rates, they carry high risks. Coding errors and hacks are a common challenge in DeFi.

Pantera Capital is an American hedge fund and venture capital firm focused on digital assets headquartered in Menlo Park, California. The fund specializes in cryptocurrencies and blockchain technology. It is one of the largest digital asset funds in the world by managed assets.

References

  1. 1 2 Madhavan, Ananth; Porter, David; Weaver, Daniel (2005-08-01). "Should securities markets be transparent?". Journal of Financial Markets. 8 (3): 265–287. CiteSeerX   10.1.1.201.6264 . doi:10.1016/j.finmar.2005.05.001.
  2. ↑ Kyle, Margaret K.; Ridley, David B. (1 September 2007). "Would Greater Transparency And Uniformity Of Health Care Prices Benefit Poor Patients?". Health Affairs. 26 (5): 1384–1391. doi: 10.1377/hlthaff.26.5.1384 . PMID   17848449.
  3. ↑ "Dictionary of Finance and Banking - Oxford Reference" . Retrieved 2017-02-06.
  4. ↑ Yogev, Tamar (2010-07-01). "The social construction of quality: status dynamics in the market for contemporary art". Socio-Economic Review. 8 (3): 511–536. doi:10.1093/ser/mwp030. ISSN   1475-1461. S2CID   153927678.
  5. ↑ Felix Goltz; Schröder, David (2010-04-01). "Hedge Fund Transparency: Where Do We Stand?". The Journal of Alternative Investments. 12 (4): 20–35. doi:10.3905/jai.2010.12.4.020. S2CID   16137828.
  6. ↑ Strathern, Marilyn (2000-06-01). "The Tyranny of Transparency". British Educational Research Journal. 26 (3): 309–321. doi:10.1080/713651562. ISSN   1469-3518. S2CID   144636355.
  7. ↑ Best, Jacqueline (2005-02-10). The Limits of Transparency: Ambiguity and the History of International Finance. Cornell Studies in Money. Ithaca, NY: Cornell University Press. ISBN   9780801473777.
  8. ↑ Etzioni, Amitai (2010-12-01). "Is Transparency the Best Disinfectant?". Journal of Political Philosophy. 18 (4): 389–404. doi:10.1111/j.1467-9760.2010.00366.x. ISSN   1467-9760.
  9. 1 2 MacKenzie, Donald; Millo, Yuval (2003-07-01). "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange". American Journal of Sociology. 109 (1): 107–145. CiteSeerX   10.1.1.461.4099 . doi:10.1086/374404. ISSN   0002-9602. S2CID   145805302.
  10. ↑ McGivern, Gerry; Fischer, Michael D. (2012-02-01). "Reactivity and reactions to regulatory transparency in medicine, psychotherapy and counselling" (PDF). Social Science & Medicine. Part Special Issue: Organization studies and the analysis of health systems. 74 (3): 289–296. doi:10.1016/j.socscimed.2011.09.035. PMID   22104085.
  11. ↑ Coslor, Erica (2016-04-01). "Transparency in an opaque market: Evaluative frictions between "thick" valuation and "thin" price data in the art market". Accounting, Organizations and Society. 50: 13–26. doi:10.1016/j.aos.2016.03.001. hdl: 11343/113919 .
  12. 1 2 Pitluck, Aaron Z. (2011-02-01). "Distributed execution in illiquid times: an alternative explanation of trading in stock markets". Economy and Society. 40 (1): 26–55. doi:10.1080/03085147.2011.529333. ISSN   0308-5147. S2CID   153650371.
  13. 1 2 Knorr Cetina, Karin; Bruegger, Urs (2002-01-01). "Global Microstructures: The Virtual Societies of Financial Markets". American Journal of Sociology. 107 (4): 905–950. CiteSeerX   10.1.1.335.2243 . doi:10.1086/341045. ISSN   0002-9602. S2CID   13742201.
  14. ↑ Cetina, Karin Knorr; Bruegger, Urs (2002-12-01). "Traders' Engagement with Markets". Theory, Culture & Society. 19 (5–6): 161–185. doi:10.1177/026327602761899200. ISSN   0263-2764. S2CID   18812736.
  15. ↑ MacKenzie, Donald; Spears, Taylor (2014-02-06). "'The formula that killed Wall Street': The Gaussian copula and modelling practices in investment banking" (PDF). Social Studies of Science. 44 (3): 393–417. doi:10.1177/0306312713517157. hdl: 20.500.11820/3095760a-6d7c-4829-b327-98c9c28c1db6 . PMID   25051588. S2CID   15907952.
  16. ↑ "Understanding How Blockchain Works and Why it Will Transform FX | Finance Magnates". Finance Magnates | Financial and business news. 2016-12-30. Retrieved 2017-06-21.
  17. ↑ Stafford, Philip (18 December 2016). "ICAP looks to process forex trades on blockchain". Financial Times. Archived from the original on 2022-12-10.
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