Sunshine Trading and Financial Market Equilibrium

This paper considers the possibility that certain traders in a financial market preannounce the size of their order prior to trading, a practice that has come to be known as “sunshine trading.” Assuming that preannouncement is made by some of the liquidity traders, we examine two possible effects it might have on the financial market equilibrium. First, since it identifies certain trades as informationless, preannouncement changes the nature of any informational asymmetries that might exist in the market. Second, preannouncement can coordinate the supply and demand of liquidity in the market. We show that in most cases preannouncement reduces the trading costs of the those who preannounce, but its effects on the trading costs and welfare of other traders can be positive or negative. We also examine the implications of preannouncement for the distribution of prices and the amount of information prices reveal._x000B_