In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, a market is transparent if much is known by many about: What products and services or
capital assets
A capital asset is defined as property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or int ...
are
available
In reliability engineering, the term availability has the following meanings:
* The degree to which a system, subsystem or equipment is in a specified operable and committable state at the start of a mission, when the mission is called for at a ...
,
market depth
In finance, market depth is a real-time list displaying the quantity to be sold versus unit price. The list is organized by price level and is reflective of real-time market activity. Mathematically, it is the size of an order needed to move th ...
(quantity available), what
price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
, and where. Transparency is important since it is one of the theoretical conditions required for a
free market
In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any o ...
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.
A high degree of market transparency can result in
disintermediation
Disintermediation is the removal of intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution channels, which h ...
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. A transparent market should also provide necessary information about quality and other product features, although quality can be exceedingly difficult to estimate for some goods, such as artworks.
While the stock market is relatively transparent,
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as sho ...
s 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. 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.
Critical transparency
There is a rich literature in accounting that takes a critical perspective to market transparency, focusing on the nuances and boundaries. For example, some researchers question its utility (e.g. Etzioni). This also connects to the performativity of quantitative models
or "reactivity." Specific cases include transparency in the
art market
The art market is the marketplace of buyers and sellers trading in commodities, services, and works of art.
The art market operates in an economic model that considers more than supply and demand: it is a hybrid type of prediction market where a ...
. There are also studies from finance that note concerns with market transparency, such as perverse effects including decreased market liquidity and increased price volatility.
This is one motivation for markets that are selectively transparent, such as "dark pools".
Dynamics of transparency may also differ between investment markets,
cambist markets where goods trade without being used up,
and other types of markets, e.g. goods and services.
In
fair value accounting
Mark-to-market (MTM or M2M) or fair value accounting is accounting for the "fair value" of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed "fair" ...
(FVA), transparency may be complicated by the fact that level 2 and 3 assets cannot strictly be
marked-to-market, given that no direct market exists, creating questions about what transparency means for these assets. Level 2 assets may be
marked-to-model, a topic of interest in the
social studies of finance,
while Level 3 assets may require inputs including management expectations or assumptions.
In the Forex market
There are few markets that require the level of privacy, honesty, and trust between its participants as the Forex (
FX) market. This creates great obstacles for traders, investors, and institutions to overcome as there is a lack of transparency, leading to the need to develop trust with trading partners and developing these relationships through social means, such as "gifts of information," which is even seen on the trading floors of global investment banks that service institutional investors.
With little to no transparency, trader's ability to verify transactions becomes virtually impossible, at least if one does not have faith that the market exchange is operating in a well-run fashion, a problem that is unlikely with the major brokerage services open to institutional investors (e.g. Reuters, Bloomberg, and Telerate). In a situation with a problematic market exchange lacking transparency, there would be no trust between the client and the broker, yet surprisingly, there is nonetheless demand to trade in dark pools.
This has also become an area of financial innovation.
Forex markets are now also a target for new
blockchain
A blockchain is a type of distributed ledger technology (DLT) that consists of growing lists of records, called ''blocks'', that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a ...
innovations, which would allow trading outside of centralized exchanges or change the way these exchanges operate.
See also
*
Competition regulator
A competition regulator is the institution that oversees the functioning of the markets. And the Law in which it takes cognizance of situations having any type of impediments and distortions on the markets and correct them is the competition law ...
*
Consumer organization
Consumer organizations are advocacy groups that seek to protect people from corporate abuse like unsafe products, predatory lending, false advertising, astroturfing and pollution.
Consumer Organizations may operate via protests, litigation, Adver ...
*
Consumer protection
Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent business ...
*
Efficient market
The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...
*
Extractive Industries Transparency Initiative
The Extractive Industries Transparency Initiative (EITI) is a global standard for the good governance of oil, gas and mineral resources. It seeks to address the key governance issues in the extractive sectors.
The EITI Standard requires informa ...
(or EITI)
*
Information
Information is an abstract concept that refers to that which has the power to inform. At the most fundamental level information pertains to the interpretation of that which may be sensed. Any natural process that is not completely random ...
*
International Sugar Organization
The International Sugar Organization is an intergovernmental organization, based in London, which was established by the International Sugar Agreement of 1968, as the body responsible for administering the Agreement. Unlike its predecessors under p ...
*
Market anomaly
A market anomaly in a financial market is predictability that seems to be inconsistent with (typically risk-based) theories of asset prices. Standard theories include the capital asset pricing model and the Fama–French three-factor model, Fama-F ...
*
Shell corporation
A shell corporation is a company or corporation that exists only on paper and has no office and no employees, but may have a bank account or may hold passive investments or be the registered owner of assets, such as intellectual property, or s ...
*
Transfer pricing
In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. Because of the potential for cross-border controlled transactions to distort ...
*
Transparency (behavior)
As an ethic that spans science, engineering, business, and the humanities, transparency is operating in such a way that it is easy for others to see what actions are performed. Transparency implies openness, communication, and accountability.
Tran ...
*
Underground economy
A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
*
Valuation (finance)
In finance, valuation is the process of determining the present value (PV) of an asset. In a business context, it is often the hypothetical price that a third party would pay for a given asset. Valuations can be done on assets (for example, inve ...
References
{{Authority control
Market (economics)