Undisclosed Orders and Optimal Submission Strategies in a Limit Order Market
University of Toronto - Rotman School of Management
Bocconi University and IGIER
October 1, 2012
EFA 2008 Athens Meetings Paper
AFA 2009 San Francisco Meetings Paper
Reserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This article outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders while simultaneously setting price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always benefit from reserve orders, whereas small traders only benefit when the tick size is large.
Number of Pages in PDF File: 44
Keywords: reserve orders, limit order book, liquidity, welfare
JEL Classification: G14working papers series
Date posted: March 6, 2008 ; Last revised: October 7, 2012
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