2.VI What is the optimal degree of equity pre-trade transparency?

The previous paragraphs illustrate that pre-trade transparency and dark liquidity both have their respective pros and cons. So what makes the ‘optimal degree’ of equity pre-trade transparency? Leading determinants for the optimal degree of equity pre-trade transparency (versus dark liquidity) are considered to be (1) liquidity and (2) investor protection.1 Thus, the optimal degree of equity pre-trade transparency is one that supports the most optimal amount of liquidity and investor protection.2

Generally, those investors who know least about market conditions most favour pre-trade transparency, often being retail investors. Those investors who know most, usually being professional investors, oppose pre-trade transparency. Pre-trade transparency would reduce their informational advantage,3 as well as increase their trading costs (e.g. market impact).4 That being said, professional investors want to see pre-trade information of other potential transactions, as it enables them to observe the market.5

The foregoing elements are mere generalizations and are difficult to apply in practice. The ambiguous nature of pre-trade transparency (i.e. it can both support and reduce liquidity) makes it difficult to ensure an outcome that results in optimal liquidity and investor protection. Different types of investors, but also different types of financial instruments (e.g. liquid versus illiquid), make it hard to assess what degree of equity pre-trade transparency is actually ‘optimal’.