The Cost of Trading Transparency: What We Know, What We Don’t Know, and How We Will Know

Abstract

Results from several major studies of index composition changes indicate that trading transparency accounts for more than half the market impact cost of composition changes in the two most popular U.S. indices. The growth of transparent custom index exchange-traded funds (ETFs) and the introduction of actively managed ETFs with relatively transparent trading will increase investor exposure to trading transparency costs. Fortunately, researchers can quantify the performance penalty that trading transparency imposes on investors.