Is full pre-trade transparency a good thing?

It is debatable whether a market should be fully pre-trade transparent, or allow for omissions in the publication of order data – and, if so, to which extent.

On the one hand, it can be argued that full pre-trade transparency is essential to:

• Publicly displayed liquidity – a higher level of pre-trade transparency means that there is a higher number of displayed orders sitting in the book (i.e., higher order book depth) and potentially a narrower displayed bid-ask spread;
• Liquidity – displaying orders can attract counterparties to the market (I may only become interested in making a trade after seeing a limit order in the book that suits me);  
• Price discovery – if all trading interests were publicly displayed, the price formation process would be faster and richer (for every order that is entered with no pre-trade transparency, it is one less order contributing with information to the price formation process).

On the other hand, it can be argued that reduced pre-trade transparency is essential to:

• Block trading – an investor may not be willing to place a large block order if its details are to be made public, since other market participants could then reactively enter/modify/cancel orders, damaging the price conditions for the block order.

MIFID2/MIFIR

The MIFID2/MIFIR regulatory package seems to have been designed having all this in mind, as it requires pre-trade transparency for a wide range of instruments, while allowing for exceptions in the case of large trades.