The level and type of transparency that delivers efficiency and investor protection in any particular market needs to take into account the liquidity characteristics of the asset, the market microstructure and the experience and market power of the market’s users.

As mentioned above, equity markets tend to have much greater levels of both pre- and post-trade transparency than, for example the bond market. This is primarily due to differences in (1) instrument and consequently investor behaviour and (2) markets.

Differences in instrument and investor behaviour - the only way for a shareholder to terminate his investment in shares is to sell his shares to someone else (typically in the secondary market). Bond holders, on the other hand, can either sell their bonds in the secondary market or they can simply wait till the bond matures and the issuer repays the debt. Consequently, many investors in bonds buy and hold their instruments till maturity.

Differences in markets – While most equity trading takes place on stock exchanges (i.e. regulated markets) and other Multilateral Trading Facilities, the vast majority of bond trading takes place over the counter (OTC). What does this mean? The OTC market involves parties negotiating directly with one another, rather than on a regulated market or a MTF. Dealers act as market makers by quoting prices at which they will sell (ask) or buy (bid) to other dealers and to their clients or customers. This can be done either via the telephone (i.e. voice broking) or via trade matching platforms. Inter-dealer brokers provide an important degree of liquidity to the market by allowing dealers to cover their positions with each other.


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