CFAI Reading 41/SS 14/ Problem 3

Problem 3 on p331 of CFAI Reading#41 asks whether E-Crossnet (type of ECN) should disclose unmatched (in the cross) quantities of sells and buys. The answer states that this information should not be disclosed: “If E-Crossnet were to disclose the unmatched quantities, it would provide useful information to other parties that would affect the supply and demand of these stocks in which clients want to transact. As a result of the information leakage, t-costs for its clients would likely rise”. Does that mean that clients who come to ECN are aware that their order can be only partially filled and prefer that to higher t-costs (else they would go to auction market for example?)? Why is CFAI answer so unconditional (sorry, not sure if that’s the right word to use)? Aren’t there advantages and disadvantages of disclosing unmatched quantities?

disclosure would allow someone gaming on open interests.

But there is such disclosure in auction or automated auction markets, right?

i am not sure. my impression has been in automated order driven system, traders send their trades in and then hope they will cross. that’s why most traders rush to get their trade in early in the morning. if the market is too shallow for the day, they would turn to dealer’s market to get job done. someone on the desk should be able to give you more accurate view.


If I’m trying to sell say 100,000 shares of XYZ and the liquidity of the XYZ is not all that great, I will want to use an ECN hoping that my sell order will be all or partially filled by someone else looking to buy XYZ. This keeps the trade “private” in the sense that if only 10,000 shares were crossed, they dont disclose that 90,000 were not. If someone had knowledge of the actual order size they might try to game it by selling ahead of me driving the price down even further which will increase my implementation costs and potential profit.