economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

, a market is transparent if much is known by many about: What products and services or capital assets 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 (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 ...

, 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 ot ...

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 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 s ...

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 ...

. 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 innovations, which would allow trading outside of centralized exchanges or change the way these exchanges operate.

References

{{Authority control Market (economics)

Critical transparency

In the Forex market

See also

References