1. Discussion: Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE By Ekkehart Boehmer Discussion by Pete Kyle The Federal Reserve Bank of Atlanta Financial Markets Conference 2004 Sea Island, GA April 15, 2004

2. What does Theory Predict About Open Order Book? Maybe it should not matter that much, assuming current bid and ask prices displayed. My theories suggest constant depth away from quote –Even if traders do not see the orders, they can assume they are there.

3. Co-ordination Problem How can traders provide constant depth away from current quote? Many traders should place scaled limit orders, equally dense at every tick, adjusting to current market conditions. Implies all traders have equal trading interest at all times. –But traders participate more sporadically. –And traders place “large” orders on few ticks.

4. Specialist Role in Non-Transparent Market Suppose traders place large discrete orders at few ticks. Specialist fills in gaps in book –Including penny-ing. Costly to other traders –Accidental bunch-ing on the same tick. –No mechanism for covering ticks evenly.

5. Implications of Closed Book Traders who cannot see book deterred from placing limit orders. Specialist fills in gaps. –Other floor traders can try to fill gaps too. Profit opportunity for specialist. But overall liquidity lower than it might otherwise be. These implications are consistent with the paper.

6. Implications of Open Order Book New orders should “fill in gaps” in book. Cancellations should occur when too much depth offered at particular ticks. Specialist participation should decrease. Overall liquidity should increase somewhat. The paper finds last two points, but does not look at the first two points.

7. Implications with Competing Markets Suppose other trading venues compete with NYSE for market share. Assume all markets completely transparent. Then overall depth can be approximately constant, even if it varies across venues. Not clear what implications are for paper. Was NYSE market share about 85% during this period?

8. Other Changes in Market Structure and Transparency Tick size reductions from eighths, to sixteenths, to pennies. –Makes scaled limit order more important. Better electronic access to all markets. More computing power on traders’ desktops (both professionals and amateurs). Evolution of “cash-settlement” based trading strategies: VWAP, matching close. Increased competition among trading venues. These changes make it harder to infer that changes are due to open limit order book.

9. Profitability of Trades If market fall through a “hole” in limit order book: –Trades on the other side of the hole should be profitable. –“Hasbrouck noise” might be associated with this. If unusually large quantity at a particular tick: –Prices should “bounce” off this tick, i.e., penny-ing would be profitable. –Might create positive autocorrelation, with ambiguous implications of what to infer from Hasbrouck methodologies.

10. SOD Data: Account Numbers Can individual trader’s strategies be identified? –Pennying, filling in gaps –Scaled limit orders –Cancellation when others at same tick Who is competing with the specialists?