Transparency

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Transparency in financial markets refers to the amount of on-going market data the marketplaces provide to investors connected to securities' pricing and movements. Complaints of lack of transparency on U.S. capital markets have recently emanated from the bond market and so-called "dark pools" of securities-trading groups.

Seeing through

The basic level of market pre-trade transparency allows investors and traders to track a security's updated bids and offers and latest market price to avoid the large spreads that usually harm investors.^[1] Intraday traders take pre-trade transparency a step further, preferring to view electronic order books showing the last five bid and offer prices of securities. Both also require post-trade transparency through full disclosure of transaction fees and other expenses by exchanges and investment intermediaries.

The Securities and Exchange Commission has addressed these issues in the U.S bond market, noting numerous complaints from investors about unusually large bid-offer spreads, particularly in the municipal bond market, and high transaction fees.^[2] In January 2006 SEC Chief Economist Chester S. Spatt told the American Finance Association that, despite bond-dealer fears, research shows that increasing market transparency tightens future spreads in bond markets.

Latest news

Some traders have recently complained that the increasingly popular virtual private trading arenas known as dark pools, where large institutional investors can quickly shift large blocks of securities without unduly spooking the market, are starting to cloud market transparency.^[3] Researchers claim that up to 10 percent of all NYSE and NASDAQ trades occur in dark pools, where trading is done 'in the dark' and commission-free, removing that much pricing information from the remaining trades performed on exchanges that charge commission.