Transparency in the equity market: Evidence from a natural experiment

Regulators promote market transparency as a way to lower transaction costs and boost liquidity. However, in theory, it can hinder trading in certain circumstances as some investors may prefer a degree of opaqueness. The existing evidence on its benefits is inconclusive and depends on the market scenarios. This study aims to shed light on the issue by examining the effects of implementing the National Market System (NMS) as an exogenous shock on post-trade transparency and transaction costs. Using 11 years of data from 2834 firms on NASDAQ, we find that the NMS improved post-trade transparency, leading to a reduction in quoted and percentage spreads. Our results provide insights for creating effective policies to maintain fairness, order, and stability in the stock market.