Market for Information and Identity Disclosure in an Experimental Open Limit Order Book

Stock exchanges have recently introduced specialists to improve market quality of less traded stocks. This paper studies the effect of market making in the Italian Stock Exchange, where information disclosure requirements are imposed on specialists. The focus is on the natural experiment of STAR, a group of small-medium capitalization stocks that are assigned a specialist starting from 2001. Because liquidity requirements are not binding for the sample stocks, the analysis can concentrate on the specialists' obligations of information disclosure. The results show that specialists' activity as information providers improves market quality by reducing the bid-ask spread and price volatility. Information asymmetries, measured by the probability of informed trading (PIN), and the adverse selection component of the spread significantly decrease. An event study approach provides evidence that the information released by the specialists is perceived as useful by market participants.