Does anonymity matter in electronic limit order markets ?

T. FOUCAULT, S. Moinas, E. Theissen

Review of Financial Studies

September 2007, vol. 20, n°5, pp.1707-1747

Departments: Finance, GREGHEC (CNRS)

We develop a model in which limit order traders possess volatility information. We show that in this case the size of the bid'ask spread is informative about future volatility. Moreover, if volatility information is in part private, we establish that (i) the size of the bid'ask spread and (ii) its informativeness about future volatility should change in the same direction when limit order traders' identifiers stop being disclosed. We test these predictions using data from the Paris Bourse. As expected, we find that the average quoted spread and its informativeness are significantly smaller when limit order traders' identifiers are concealed. These findings suggest that the limit order book is a channel for volatility information