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 ]

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 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, 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 is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, which is the study of production, distribution, and consumption of goods and services; the discipline of financial economics bridges the two. Financial activities take place in financial systems at various scopes; thus, the field can be roughly divided into personal, corporate, and public finance.

<span class="mw-page-title-main">Stock market</span> Place where stocks are traded

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as stock that is only traded privately, such as shares of private companies that are sold to investors through equity crowdfunding platforms. Investments are usually made with an investment strategy in mind.

<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. The term is usually applied to longer-term debt instruments, with maturity of at least one year. Corporate debt instruments with maturity shorter than one year are referred to as commercial paper.

In finance, a contract for difference (CFD) is a legally binding agreement that creates, defines, and governs mutual rights and obligations between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time. If the closing trade price is higher than the opening price, then the seller will pay the buyer the difference, and that will be the buyer's profit. The opposite is also true. That is, if the current asset price is lower at the exit price than the value at the contract's opening, then the seller, rather than the buyer, will benefit from the difference.

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.

Sanford "Sandy" Jay Grossman is an American economist and hedge fund manager specializing in quantitative finance. Grossman’s research has spanned the analysis of information in securities markets, corporate structure, property rights, and optimal dynamic risk management. He has published widely in leading economic and business journals, including American Economic Review, Journal of Econometrics, Econometrica, and Journal of Finance. His research in macroeconomics, finance, and risk management has earned numerous awards. Grossman is currently Chairman and CEO of QFS Asset Management, an affiliate of which he founded in 1988. QFS Asset Management shut down its sole remaining hedge fund in January 2014.

<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:

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 of financial markets 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.

Factor investing is an investment approach that involves targeting quantifiable firm characteristics or “factors” that can explain differences in stock returns. Security characteristics that may be included in a factor-based approach include size, low-volatility, value, momentum, asset growth, profitability, leverage, term and carry.

Diamond Standard is the producer of an exchange traded, regulated diamond commodity. Equivalent to a standard gold bar for the diamond market, the diamond coin and bar enable investors to access an estimated $1.2 trillion asset class for the first time. Futures contracts are in development by CFTC-licensees, and an investment trust launched in 2022.

Decentralized finance offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain, mainly Ethereum. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. DeFi uses a layered architecture and highly composable building blocks. Some applications promote high-interest rates but are subject to high risk. Coding errors and hacks have been common in DeFi.

<span class="mw-page-title-main">Carbon quantitative easing</span>

Carbon quantitative easing (CQE) is an unconventional monetary policy that is featured in a proposed international climate policy, called a global carbon reward. A major goal of CQE is to finance the global carbon reward by managing the exchange rate of a proposed representative currency, called a carbon currency. The carbon currency will be an international unit of account that will represent the mass of carbon that is effectively mitigated and then rewarded under the policy. The carbon currency will function primarily as a store of value and not as a medium of exchange.

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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