Sunshine Trading and Financial Market Equilibrium Anat R. Admati Paul Pfleiderer Stanford University In this article, we consider the possibility that some liquidity traders preannounce the size of their orders, a practice that e to be known as “sunshine trading.” Two possible effects prean- nouncement might have on the equilibrium are examined. First, since it identifies certain traders as informationless, preannouncement changes the nature of any informational asymetries in the market. Second, preannouncement can coordi- nate the supply and demand of liqudity in the market. We show that preannouncement typicaly reduces the trading costs of those who prean- nounce, but its effects on the trading costs and welfare of other traders are ambiguous. We also examine the implications of preannouncement for the distribution of prices and the amount of infor- mation that prlces reveal. Much attention has been focused in recent years, especially following the crash of October 1987, on the liquidity of financial markets. Some have sug- gested that liquidity would be enhanced if traders engaged in “sunshine trading.” A trader following a Support from the Institute for Quantitative Research in Finance. the Sloan Foundation, the Batterymarch and Anne T. and Robert M. Bass fellowships, and the Stanford Program in Finance is gratefully acknowledged. Part of this article was written while the first author was at the Recanati School of Man- agement at Tel-Aviv University. We would like to thank Mark Rubinstein for suggesting this topic and for ments. We have benefited from the comments of Fischer Black, Jürgen Dennert, David Kreps, Allsa Röell, Steve Wunsch, an anonymous referee, and especially Chester Spatt. We ate also grateful for ments of the seminar participants at UBC. Stanford, Cal Tech, and Tel-Aviv University and at the NYSE/USC/UCLA (Market Micro- structure) and CEPR/STEP (Financial Intermediation and Saving Behavior) symposia. Address
