Does Transparency Harm Traders: Evidence from a Disclosure Regulation

Abstract

Does transparency harm block traders? In 2004, Securities and Exchange Board of India (SEBI) mandated the disclosure of trades accumulating to more than 0.5% of existing float in a single day. Using unique transaction-level database from the National Stock Exchange (NSE) in India, we present evidence that block traders earn substantially higher returns by disclosing their trades than by executing bulk deals. Robustness checks show that liquidity provision or other explanations are not enough to explain this return differential. Disclosure leads to lower future spreads, lower price volatility and smaller price momentum and reversal. Hence, we argue that disclosing large trades lead to higher market efficiency.

Keywords: Transparency, Efficiency, Emerging Market, Market Regulation

JEL Classification: G14, G15, G18, G24, D40