Why Do Traders Choose to Trade Anonymously?
University of Melbourne - Department of Finance; Financial Research Network (FIRN)
Tālis J. Putniņš
University of Technology, Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN)
Kar Mei Tang
University of Sydney - Discipline of Finance
February 24, 2011
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
This paper examines the use, determinants and impact of anonymous orders in a market where disclosure of broker identity in the trading screen is voluntary. We find that most trading occurs non-anonymously, contrary to prior literature that suggests liquidity gravitates to anonymous markets. By strategically using anonymity when it is beneficial, traders reduce their execution costs. Traders select anonymity based on various factors including order source, order size and aggressiveness, time of day, liquidity and expected execution costs. Finally, we report how anonymous orders affect market quality and discuss implications for market design.
Number of Pages in PDF File: 45
Keywords: Anonymity, execution cost, broker identity, strategic trading
JEL Classification: G14, G29Accepted Paper Series
Date posted: February 28, 2011
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