Dynamic Price Discovery : Transparency vs. Information Design

This paper studies how public disclosure of past trade details affects price discovery dynamics under asymmetric information with heterogenous hedging motives. We model that an informed buyer (informed trader) sequentially trades with a series of uninformed sellers (hedgers). The informed buyer is forward-looking and risk-neutral, and uninformed sellers are myopic and heterogeneously risk-averse. We discover that sellers' price discovery over the underlying fundamentals is crucially affected by what they can observe about past trade details. Specifically, (i) the availability of past trade details, paradoxically, makes it easier for the informed party to hide her private information and offer opaque prices. (ii) Post-trade price transparency delays price discovery, but once it happens, it is always perfect. (iii) In contrast, when only past order information is available, price discovery can never be perfect, and can even be in the wrong direction. We establish that, under some minor regularity conditions, our equilibrium characterization achieves the maximal degree of ignorance among all pure-strategy PBE. Hence, this paper can be viewed as a worst case analysis for regulators who care about market transparency. Moreover, we show that our findings are robust when the informed party's bargaining power decreases in the length of past trade history. Finally, we extend our results to the case where the informed buyer has a non-zero outside option, and the case where both parties switch their trading positions