Mandatory Disclosure in Oligopolistic Market Making

2026-04-11

AI Summary

This study examines the liquidity effects of mandatory disclosure regulations in an oligopolistic market-making environment. By developing a multi-period Kyle model that integrates mandatory disclosure with imperfect competition among market makers, and combining linear equilibrium analysis with a difference-in-differences empirical strategy based on the Sarbanes-Oxley Act, the paper demonstrates that disclosure policies enhance market liquidity by reducing price impact. The theoretical analysis establishes the existence and uniqueness of a linear equilibrium. Empirically, mandatory disclosure is found to significantly narrow bid-ask spreads, with this effect more pronounced for stocks with fewer market makers—indicating weaker competition. These findings highlight that the liquidity-enhancing impact of disclosure is highly contingent on market structure.

Technology Category

Game Theory and Economic Paradigms: Auctions and Market-Based SystemsNatural Language Processing: Discourse, Pragmatics & Argument MiningSearch and Optimization: Mixed Discrete/Continuous Search

Application Category

Economics, Online Markets and Human Computation: Uses of LLMs and GenAI for marketplace design, bidding, and strategic interactionsSecurity and Privacy: Data transparency and provenanceWeb Mining and Content Analysis: Interdisciplinary science discovery with web data mining

Abstract

We develop a multi-period Kyle-type model that incorporates both mandatory disclosure of informed trades and imperfect competition among market makers. We prove the existence and uniqueness of a linear equilibrium and show that the liquidity-enhancing effect of disclosure is fundamentally linked to the degree of market-making competition. Disclosure lowers trading costs by reducing price impact, and its marginal benefit is strictly larger when competition is weak. We empirically validate this prediction using the 2002 Sarbanes-Oxley Act disclosure reform as a natural experiment. A difference-in-differences analysis of U.S. equities confirms that the spread reduction following enhanced disclosure is significantly larger for stocks with fewer active market makers.

Problem

• mandatory disclosure
• oligopolistic market making
• market liquidity
• price impact
• competition

Innovation

• mandatory disclosure
• oligopolistic market making
• Kyle model
• price impact
• liquidity