4/9/2019 Price Transparency

INSIGHTS MARKETS & ECONOMY

Price Transparency
REVIEWED BY WILL KENTON | Updated May 18, 2018

WHAT IS Price Transparency

Price transparency typically refers to the extent to which information about the bid prices, the
ask prices and trading quantities for a specific stock is available. For example, the Nasdaq II
quote system provides information on all the bids and asks at various price levels for a
particular stock. On the other hand, NYSE quotes are less transparent, displaying only the
highest bid and lowest ask prices. In that scenario, only the market specialists know the
complete order flow for a stock.

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BREAKING DOWN Price Transparency

Price transparency is important because knowing what others are bidding, asking, and trading
can help determine the supply and demand of a security, good, or service, i.e., its true value. If
the information proves to be insufficient or inaccessible, that specific market may be deemed
inefficient.

At its core, market efficiency measures the availability of market information that provides the
maximum amount of opportunities to purchasers and sellers of securities to effect transactions
without increasing transaction costs. For example, the Sarbanes-Oxley Act of 2002 required
greater financial transparency for publicly traded companies. It helped show that credible
financial statements could generate more confidence in the stated price of a security. With fewer
surprises, market reactions to earnings reports are smaller.

Price Transparency and Costs

In economics, a market’s transparency is determined by how much is known about its products
and services and the capital assets that are available, as well as the pricing structure and where

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they can be found. How transparent that market is helps determine the degree to which that
market is free and its relative efficiency. 

Elsewhere in the economy, the level of price transparency can promote or depress competition.
For example, in health care, patients often do not know what a specific medical procedure
actually costs, leaving them without much, if any, opportunity to negotiate a better price.

Price transparency does not necessarily mean that prices will drop. Higher prices can result if
sellers become reluctant to offer certain buyers. Price transparency can also make it easier for
collusion, or a non-competitive clandestine or sometimes illegal agreement between rivals that
attempts to disrupt the market’s equilibrium. Price volatility, or the rate at which a security,
good or service increases or decreases, could be a byproduct of transparency as well.
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A high degree of market transparency can also result in disintermediation, or the removal or
reduction in the use of intermediaries between producers and consumers; for example, by
investing directly in the securities market rather than through a bank

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Related Terms
Real-Time Trade Reporting
Real-time trade reporting is a requirement that market makers report each trade immediately after the
transaction is completed. more

Price Improvement
Price improvement involves attaining a higher bid price, if selling a stock, or a lower ask price, if buying a
stock, than the quoted price. more

Learn How Companies Display Price Leadership

Price leadership occurs when a preeminent company determines the price of goods or services within its
market and other firms in the sector follow suit. more

Price Continuity
Price continuity is a characteristic of a liquid market in which there are many buyers and sellers for a
given security and bid-ask spreads are narrow. more

Price Sensitivity
Price sensitivity is the degree to which the price of a product affects the purchasing behaviors of
consumers. more

Market Price
The market price is the cost for an asset or service. more

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