Price transparency – constantly surrounds modern man. Once we used to flip through magazines and catalogs of literally a couple of brands, compare prices and choose the more suitable option. Now people use “Amazon” on their smartphones and choose their next purchase or traders who buy stocks from their smartphones. So what does this example relate to price transparency? In this article, let’s explore that.
What is price transparency
Price transparency is the level of availability of information about the price of a particular stock, the bid and asks prices and the volume of trading. Price transparency is often characterized by these two sentences:
- I know what price I will be charged
- I know what price you will be charged
Price transparency allows us to know the true value of an item, which greatly influences supply and demand determinations for that item. A great example of price transparency is information about which traders are buying or selling a stock, information about all the bids and requests for different price levels for a particular stock, and even guesses about how the stock will move in the near future.
Examples of Price Transparency
Probably the most popular and well-worn example would be the American stock exchange “NASDAQ”. The “Nasdaq level II” quotation system provides quite detailed information about the bids for the price of a certain share, which allows traders to make a better choice when trading the stock.
A lesser measure of price transparency is provided by the standard “New York Stock Exchange” (NYSE) quotes, which display only the highest and lowest price of a stock. In the case of the NYSE, not all bidders have equal information, which creates a not entirely equal and fair trading environment.
Consequences of Increased Price Transparency
With great price transparency, it’s easier to sway the market by collusion between opponents. Also, with great transparency, the need for intermediaries, such as banks or investment companies is reduced, as investors will invest directly in the securities market. Also, with an increase in price transparency, the cases of insider trading should decrease, which is the opposite of the concept of “price transparency”.
How price transparency has evolved so quickly in 20 years
The Internet and its accessibility have greatly increased price transparency around the world. Once you had to go to three or four stores to find out the best price for a certain product. Now everyone with a couple of clicks on their smartphone can find almost any information about anything they want. When you buy any product, you can see detailed information about its composition, where it was made, and other additional information that will help you make comparisons with other products. You can easily find out the price of almost any product and compare it to other prices in different markets.
Also, the availability of the Internet has greatly helped the development of electronic trading. As a result, the efficiency of financial markets increased greatly, because the traders were able to make decisions much faster and to fix prices in time. Also, the development of electronic trading simplified the life of investors, who now don’t need the help of brokers to purchase assets.
