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The effects of different anonymity regimes on liquidity at Nasdaq Nordic Exchanges

Elmlund, Adrian LU and Ahl, Hannes LU (2024) BUSN79 20241
Department of Business Administration
Abstract
The purpose of this paper is to investigate the effect of various post-trade anonymity regimes on the liquidity of the Stockholm, Helsinki, and Copenhagen exchanges in 2014, 2019, 2020, and 2022. The theoretical perspectives used for this paper include information asymmetry, adverse selection, informational value of broker codes, trader dynamics under anonymity, order anticipation, and market maker dynamics. The study utilizes a unique quasi-natural setup to which a Difference-in-Differences technique is applied in order to estimate OLS regressions and evaluate the causal impact of post-trade anonymity on market liquidity. The regressions use Bid-ask Spread as the main dependent variable, but Turnover is also tested, with treatment and... (More)
The purpose of this paper is to investigate the effect of various post-trade anonymity regimes on the liquidity of the Stockholm, Helsinki, and Copenhagen exchanges in 2014, 2019, 2020, and 2022. The theoretical perspectives used for this paper include information asymmetry, adverse selection, informational value of broker codes, trader dynamics under anonymity, order anticipation, and market maker dynamics. The study utilizes a unique quasi-natural setup to which a Difference-in-Differences technique is applied in order to estimate OLS regressions and evaluate the causal impact of post-trade anonymity on market liquidity. The regressions use Bid-ask Spread as the main dependent variable, but Turnover is also tested, with treatment and time indicators, as well as their interaction term, as the main explanatory variables. The empirical foundation consists of four unique anonymization regimes, introduced to different indexes in different years on the Nasdaq Nordic. The number of firms examined during our event ranges from 156 in 2014, to 988 in 2022. The number of observations ranges from 21,043 to 137,942.

The key takeaway from this paper is that the introduction of voluntary post-trade anonymity (vPoTA) and post-trade anonymity (PoTA) yielded mixed results. The introduction of vPoTA in 2014 indicated no statistically significant results. Moreover, the incremental move from vPoTa to PoTA did not significantly improve liquidity in 2019 or 2020. Lastly, the move from complete transparency to PoTA in 2022 showed highly statistically significant results: Bid-ask Spreads decreased by an average of 10.2% while Turnover increased by 15.3%, on average, for the Mid-cap, Small-cap, and First North Index. (Less)
Please use this url to cite or link to this publication:
author
Elmlund, Adrian LU and Ahl, Hannes LU
supervisor
organization
alternative title
Does anonymization increase market quality?
course
BUSN79 20241
year
type
H1 - Master's Degree (One Year)
subject
keywords
Liquidity, Market Quality, Post-trade anonymity (PoTA), Voluntary Post-trade Anonymity (vPoTA), Adverse Selection
language
English
id
9165437
date added to LUP
2024-06-22 16:47:18
date last changed
2024-06-22 16:47:18
@misc{9165437,
  abstract     = {{The purpose of this paper is to investigate the effect of various post-trade anonymity regimes on the liquidity of the Stockholm, Helsinki, and Copenhagen exchanges in 2014, 2019, 2020, and 2022. The theoretical perspectives used for this paper include information asymmetry, adverse selection, informational value of broker codes, trader dynamics under anonymity, order anticipation, and market maker dynamics. The study utilizes a unique quasi-natural setup to which a Difference-in-Differences technique is applied in order to estimate OLS regressions and evaluate the causal impact of post-trade anonymity on market liquidity. The regressions use Bid-ask Spread as the main dependent variable, but Turnover is also tested, with treatment and time indicators, as well as their interaction term, as the main explanatory variables. The empirical foundation consists of four unique anonymization regimes, introduced to different indexes in different years on the Nasdaq Nordic. The number of firms examined during our event ranges from 156 in 2014, to 988 in 2022. The number of observations ranges from 21,043 to 137,942. 

The key takeaway from this paper is that the introduction of voluntary post-trade anonymity (vPoTA) and post-trade anonymity (PoTA) yielded mixed results. The introduction of vPoTA in 2014 indicated no statistically significant results. Moreover, the incremental move from vPoTa to PoTA did not significantly improve liquidity in 2019 or 2020. Lastly, the move from complete transparency to PoTA in 2022 showed highly statistically significant results: Bid-ask Spreads decreased by an average of 10.2% while Turnover increased by 15.3%, on average, for the Mid-cap, Small-cap, and First North Index.}},
  author       = {{Elmlund, Adrian and Ahl, Hannes}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The effects of different anonymity regimes on liquidity at Nasdaq Nordic Exchanges}},
  year         = {{2024}},
}