RFS Advance Access originally published online on June 28, 2007
Review of Financial Studies 2007 20(5):1707-1747; doi:10.1093/rfs/hhm027
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Does Anonymity Matter in Electronic Limit Order Markets?
HEC School of Management
Université de Toulouse
Bonn University and Centre for Financial Research, Cologne
Address correspondence to Thierry Foucault, HEC School of Management, Paris, 1 rue de la Libération, 78351, Jouy en Josas, France, or e-mail: foucault{at}hec.fr
JEL: G10, G14, G24
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Abstract |
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We develop a model in which limit order traders possess volatility information. We show that in this case the size of the bid–ask spread is informative about future volatility. Moreover, if volatility information is in part private, we establish that (i) the size of the bid–ask spread and (ii) its informativeness about future volatility should change in the same direction when limit order traders' identifiers stop being disclosed. We test these predictions using data from the Paris Bourse. As expected, we find that the average quoted spread and its informativeness are significantly smaller when limit order traders' identifiers are concealed. These findings suggest that the limit order book is a channel for volatility information.
We are grateful to the editor (Maureen O'Hara) and an anonymous referee for providing suggestions that greatly improved the paper. We also thank James Angel, Bruno Biais, Peter Bossaerts, David Brown, Cecilia Caglio, Fany Declerk, Gabrielle Demange, Joachim Grammig, Maria Kasch, Dima Leschinskii, Stefano Lovo, Richard Lyons, Frank deJong, Frédéric Palomino, Chester Spatt, Barbara Rindi, Richard Roll, Gideon Saar, Duane Seppi, Avi Whol and participants in various conferences (EFA, WFA, AFFI, INSEAD market microstructure workshop, the 6th ESC Toulouse-IDEI Finance Workshop, Oxford Symposium) and seminars (Bielefeld University, CORE, Frankfurt University, Duisburg University, HEC Montreal, Norwegian School of Business, University of Amsterdam, University of Rotterdam, Tilburg University and Séminaire Bachelier) for helpful comments. We thank Euronext Paris for providing the data. Financial support from the Fondation HEC and the Deutsche Forschungsgemeinschaft through SFB/TR 15 is gratefully acknowledged.