Transparency (market)

This article is about transparency in financial markets. For other uses, see transparency (behaviour).

In economics, a market is transparent if much is known by many about: What products and services or capital assets are available, market depth (quantity available), what price, and where. Transparency is important since it is one of the theoretical conditions required for a free market to be efficient. Price transparency can, however, lead to higher prices. For example, if it makes sellers reluctant to give steep discounts to certain buyers (e.g. disrupting price dispersion among buyers), or if it facilitates collusion, and price volatility is another concern.[1] A high degree of market transparency can result in disintermediation due to the buyer's increased knowledge of supply pricing.

There are two types of price transparency: 1) I know what price will be charged to me, and 2) I know what price will be charged to you. The two types of price transparency have different implications for differential pricing.[2] A transparent market should also provide necessary information about quality and other product features,[3] although quality can be exceedingly difficult to estimate for some goods, such as artworks.[4]

While the stock market is relatively transparent, hedge funds are notoriously secretive. Researchers in this area have found concerns by hedge funds about the crowding out of their trades through transparency and undesirable effects of incomplete transparency.[5] Some financial professionals, including Wall Street veteran Jeremy Frommer are pioneering the application of transparency to hedge funds by broadcasting live from trading desks and posting detailed portfolios online.[citation needed]

In the United States, the goal of the Corporate Transparency Act (CTA) is to foster greater transparency in business ownership within the United States. By mandating companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the CTA aims to curb illicit financial activities such as money laundering and terrorist financing.[citation needed] This requirement seeks to enhance accountability and deter the misuse of anonymous shell corporations for unlawful purposes. Ultimately, the CTA seeks to promote integrity in corporate governance and bolster confidence in the U.S. financial system by ensuring that the true individuals behind corporate entities are known and accountable.[citation needed]

  1. ^ Madhavan, Ananth; Porter, David; Weaver, Daniel (2005-08-01). "Should securities markets be transparent?". Journal of Financial Markets. 8 (3): 265–287. CiteSeerX 10.1.1.201.6264. doi:10.1016/j.finmar.2005.05.001.
  2. ^ Kyle, Margaret K.; Ridley, David B. (1 September 2007). "Would Greater Transparency And Uniformity Of Health Care Prices Benefit Poor Patients?". Health Affairs. 26 (5): 1384–1391. doi:10.1377/hlthaff.26.5.1384. PMID 17848449.
  3. ^ "Dictionary of Finance and Banking - Oxford Reference". Retrieved 2017-02-06.
  4. ^ Yogev, Tamar (2010-07-01). "The social construction of quality: status dynamics in the market for contemporary art". Socio-Economic Review. 8 (3): 511–536. doi:10.1093/ser/mwp030. ISSN 1475-1461. S2CID 153927678.
  5. ^ Felix Goltz; Schröder, David (2010-04-01). "Hedge Fund Transparency: Where Do We Stand?". The Journal of Alternative Investments. 12 (4): 20–35. doi:10.3905/jai.2010.12.4.020. S2CID 16137828.