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Why Do Traders Choose to Trade Anonymously?Carole Comerton-FordeUniversity of Melbourne - Department of Finance; Financial Research Network (FIRN) Tālis J. PutniņšUniversity of Technology, Sydney - UTS Business School; Stockholm School of Economics in Riga; Financial Research Network (FIRN) Kar Mei TangUniversity of Sydney - Discipline of Finance February 24, 2011 Journal of Financial and Quantitative Analysis (JFQA), Forthcoming Abstract: 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, G29 Accepted Paper SeriesDate posted: February 28, 2011Suggested CitationContact Information
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