This is an empirical study of the market transparency on the U.S. equity market. The dissertation is composed of three essays.Using two unique data sets on NASDAQ stocks, the first essay studies the influence and informational role of hidden orders in the U.S. equity markets. I find that as much as 20 percent of trading volume is executed against hidden orders in NASDAQ, and 16 percent of time the best bid and offer is represented by hidden orders. The observed bid-ask spread is 34 percent larger than the true spread because of invisible orders. Hidden orders are more likely to be used by informed traders. At intraday day level, hidden orders can generate 13 basis point return (33 percent annually), but the return of displayed orders is zero. On a two-day horizon, the portfolio of stocks with trades heavily executed against hidden buy orders outperforms the portfolio of stocks with trades heavily executed against hidden sell orders at an annualized 18-percent rate for small firms, but outperformance decreases with market capitalizations. Beyond two-day level, the hidden order return predictability disappears, indicating that the information in hidden orders is quickly incorporated into stock prices.Since there exists no return reversal, the return predictability is not due to price pressure. The second essay investigates the role and usage of odd lot trades in equity markets.Odd lots are increasingly used in algorithmic and high frequency trading, but are never reported to the consolidated tape or to data bases derived from it such as TAQ (Trades and Quotes).The essay finds the median fraction of missing odd lot trades per stock is 24% but some stocks have more than 60 % missing trades. Odd lot trades contribute 35% of price discovery, consistent with informed traders splitting orders into odd-lots to avoid detection. The omission of odd-lot trades leads to significant inaccuracies in empirical measures such as order imbalance and sentiment measures. The exclusion of odd lots from the consolidated tape raises important regulatory issues.The third essay shows that two exogenous technology shocks that increase the speed of trading from microseconds to nanoseconds do not lead to improvements on quoted spread, effective spread, trading volume or variance ratio. However, cancellation/execution ratio increases dramatically from 26:1 to 32:1, short term volatility increases and market depth decreases. This essay finds evidence consistent with quote stuffing hypothesis (Biais and Woolley, 2011), which involves submitting an extraordinarily large number of orders followed by immediate cancellation in order to generate order congestion. The stock data are handled by six independent channels in the NASDAQ based on alphabetic order of ticker symbols. The essay documents abnormally high levels of co-movement of message flows for stocks in the same channel using factor regression, a discontinuity test and diff-in-diff test.Results suggest that an arms race in speed at the sub-millisecond level is a positional game in which a trader’s pay-off depends on her speed relative to other traders. This game leads to positional externality (Frank and Bernanke, 2012), in which private benefit leads to offsetting investments on speed, or effort to slow down other traders or the exchange, with no observed social benefit.
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