Thursday, 26 February 2009

Transparency and mendacity

The Richard Thinks blog has an item about transparency today. It implies that The Economist has fallen for the self-serving nonsense of some anonymous traders:
'not having full-transparency allowed them to fully exploit the potential of secret trading strategies and that with full disclosure they would have little incentive to correct market inefficiencies through arbitrage.'
'when investors start thinking that other people are privileged to lots more relevant information and that they have an unfair disadvantage they are likely to resist activity in the market.

So "[s]ymmetry, not the amount of information, matters"'
How convenient for the financial institutions!

The first argument is clearly fallacious. Arbitrageable market inefficiencies only arise from lack of transparency. If the markets were transparent, the market inefficiencies would be visible and there would be an immediate and high profile incentive to correct them. And a much stronger one - since it is less risky and more urgent - than whatever incentives the proprietary traders may have.

The symmetry argument sounds appealing at first, but given the intrinsic asymmetry of the financial markets (where a small number of 'insiders' or experts know far more than the masses), surely the release of information by insiders is much more likely to increase than decrease symmetry?

Richard himself then goes on to say that:
"full-disclosure can result in less transparency than you had to begin with, if the users of information are overwhelmed by the sheer volume of it, and its complexity"
While this might be a short-term problem, it's likely to disappear quickly. People are nowadays pretty good at providing tools to sift through and interpret data on behalf of others. Dennis Howlett's item about XBRL is a good counterargument to this - companies will spring up to provide simplified interpretations of this information if it is released by companies. This is what has always happened in the financial markets and I see no reason why it would stop now.

The disadvantages of transparency are so small and short-term, and the benefits so strong, that there can be little debate about the public good. The only question is the protection of existing 'owners' of information, and that is a question for politics, lobbyists and interest groups, not for economists. The economic recommendation is clear: release the data!


richardthinks said...


On reflection I think my conclusions were probably a bit rash, re: too much information being bad. But I stand by my call for regulators to focus on that information being reliable, accurate, and relevant. Thanks for the link about XBRL, I had never heard of it before today... could have some very powerful applications.


Paul Wilkinson said...

Nice convo -- I posted a link to it from my "Of Potential Interest" section on

Richard is correct about the power of XBRL.