Financial over-the-counter markets have been traditionally very opaque. Recent regulation promotes transparency in some of these markets by lowering search costs, allowing traders to request quotes from multiple dealers at the same time (pre-trade transparency), and requiring public disclosure of past transactions (post-trade transparency). We evaluate these policies using a dynamic trading model with adverse selection. We show that post-trade transparency improves upon the opaque market but is dominated by pre trade transparency; moreover, adding post-trade transparency to a pre-trade transparent market offers no benefits and can be harmful. We identify cases in which lowering search costs can be detrimental to market efficiency. Finally, relying on a mechanism-design approach, we characterize the optimal trading mechanism.
regulatory disclosure delegation OTC markets post-trade transparency pre-trade transparency mechanism design Dodd-Frank act TRACE