Undisclosed Orders and Optimal Submission Strategies in a Limit Order Market

44 Pages Posted: 6 Mar 2008 Last revised: 7 Oct 2012

Sabrina Buti

Université Paris Dauphine - Department of Finance

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Date Written: October 1, 2012

Abstract

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.

Keywords: reserve orders, limit order book, liquidity, welfare

JEL Classification: G14

Suggested Citation

Buti, Sabrina and Rindi, Barbara, Undisclosed Orders and Optimal Submission Strategies in a Limit Order Market (October 1, 2012). EFA 2008 Athens Meetings Paper; AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1100303 or http://dx.doi.org/10.2139/ssrn.1100303

Sabrina Buti (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

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