Market Transparency, Investor Strategies, and Trading Costs: Evidence from the Taiwan Stock Exchange

Abstract

This paper investigates the effect of changes in pre-trade transparency on trading strategies and trading costs by examining the effects of increased transparency in the limit order book at the Taiwan Stock Exchange. Our results demonstrate that pre-trade transparency makes the market more liquid, because investors are more willing to provide liquidity, thus reducing the trading costs for liquidity demanders. Furthermore, we find evidence that investors, especially institutional traders, attempt to manage limit-order exposures by splitting orders and canceling orders faster; thus, pre-trade transparency does not increase their trading costs. Our findings suggest that pre-trade transparency affects trading strategies and trading costs differently according to the type of investor.