Abstract

http://ssrn.com/abstract=2004231
 
 

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On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements


Nikolaus Hautsch


University of Vienna - Department of Statistics and Operations Research

Ruihong Huang


Humboldt University of Berlin

February 8, 2012


Abstract:     
Trading under limited pre-trade transparency becomes increasingly popular on financial markets. We provide first evidence on traders' use of (completely) hidden orders which might be placed even inside of the (displayed) bid-ask spread. Employing TotalView-ITCH data on order messages at NASDAQ, we propose a simple method to conduct statistical inference on the location of hidden depth and to test economic hypotheses. Analyzing a wide cross-section of stocks, we show that market conditions reflected by the (visible) bid-ask spread, (visible) depth, recent price movements and trading signals significantly affect the aggressiveness of 'dark' liquidity supply and thus the 'hidden spread'. Our evidence suggests that traders balance hidden order placements to (i) compete for the provision of (hidden) liquidity and (ii) protect themselves against adverse selection, front-running as well as 'hidden order detection strategies' used by high-frequency traders. Accordingly, our results show that hidden liquidity locations are predictable given the observable state of the market.

Number of Pages in PDF File: 43

Keywords: limit order market, hidden liquidity, high-frequency trading, non-display order, iceberg orders

JEL Classification: G14, C24, C25, G17

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Date posted: February 13, 2012  

Suggested Citation

Hautsch, Nikolaus and Huang, Ruihong, On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements (February 8, 2012). Available at SSRN: http://ssrn.com/abstract=2004231 or http://dx.doi.org/10.2139/ssrn.2004231

Contact Information

Nikolaus Hautsch
University of Vienna - Department of Statistics and Operations Research ( email )
Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria
Ruihong Huang (Contact Author)
Humboldt University of Berlin ( email )
Spandauer Str. 1
Berlin, Berlin 10785
Germany
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