Trading Anonymity and Order Anticipation

60 Pages Posted: 18 Jul 2014

See all articles by Sylvain J. Friederich

Sylvain J. Friederich

University of Bristol - Department of Finance and Accounting

Richard Payne

City University London - The Business School

Date Written: July 17, 2014

Abstract

Does it matter to market quality if broker identities are revealed after a trade and only to the two traders involved? We find that implementing full anonymity dramatically improves liquidity and reduces trader execution costs. To explain this, we compare theories based on asymmetric information to an order anticipation mechanism, where identity signals trader size, allowing strategic agents to predict the future order flow of large traders. Evidence supports the anticipation hypothesis: liquidity improves most in stocks where trading is heavily concentrated among a few brokers and in stocks susceptible to temporary price pressure. Also, only traders having large market-shares benefit from anonymity.

Keywords: Trading anonymity, Limit order trading, Trading costs, Institutional investors, London Stock Exchange

JEL Classification: G12, G14

Suggested Citation

Friederich, Sylvain J. and Payne, Richard G., Trading Anonymity and Order Anticipation (July 17, 2014). Available at SSRN: https://ssrn.com/abstract=2467720 or http://dx.doi.org/10.2139/ssrn.2467720

Sylvain J. Friederich

University of Bristol - Department of Finance and Accounting ( email )

Richard G. Payne (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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