Many recommendations for reforming securities markets are predicated on the belief that providing information on order flow and other market variables to traders (i.e., increasingmarket transparency) will increase liquidity and improve price efficiency. This paper demonstrates that market transparency can actually increase price volatility and lower market liquidity. This occurs even though transparency increases the precision of traders' predictions about the asset's value. In a sufficiently large market, transparency always reduces volatility and improves market quality. We use these results to assess various policy proposals concerning the disclosure of trading information.Journal of Economic Literature Classification Numbers:D82, D83, G12, G14.

This paper demonstrates that market makers have the ability and incentive to facilitate price discovery in securities markets. Market makers can expedite the process of intertemporal price formation by setting prices to induce statistically more informative order flow. Such actions constitute an investment in the production of information. Under certain conditions, market makers can recoup the cost of this investment by making better pricing decisions in the future with more precise information. These conditions are analyzed in a general model and several examples that illustrate the complex nature of price discovery are presented.