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The Impact of Iceberg Orders in Limit Order Books

Stefan Frey

Leibniz Universität Hannover; Centre for Financial Research (CFR)

Patrik Sandås

University of Virginia

May 17, 2009

AFA 2009 San Francisco Meetings Paper

We examine the impact of iceberg orders on the price and order flow dynamics in limit order books. Iceberg orders allow traders to simultaneously hide a large portion of their order size and signal their interest in trading to the market. We show that when market participants detect iceberg orders they tend to strongly respond by submitting matching market orders consistent with iceberg orders facilitating the search for latent liquidity. The greater the fraction of an iceberg order that is executed the smaller its price impact consistent with liquidity rather than informed trading. The presence of iceberg orders is associated with increased trading consistent with a positive liquidity externality, but the reduced order book transparency associated with iceberg orders also creates an adverse selection cost for limit orders that may partly offset any gains.

Number of Pages in PDF File: 49

Keywords: Hidden Liquidity, Iceberg Orders, Limit Order Markets, Transparency

JEL Classification: G10, G14

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Date posted: March 27, 2008 ; Last revised: June 2, 2009

Suggested Citation

Frey, Stefan and Sandås, Patrik, The Impact of Iceberg Orders in Limit Order Books (May 17, 2009). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1108485 or http://dx.doi.org/10.2139/ssrn.1108485

Contact Information

Stefan Frey
Leibniz Universität Hannover
Koenigsworther Platz 1
30167 Hannover, DE 30167
Centre for Financial Research (CFR) ( email )
Albertus-Magnus Platz
Cologne, 50923
Patrik Sandas (Contact Author)
University of Virginia ( email )
McIntire School of Commerce
Charlottesville, VA 22904
United States
1-434-243-2289 (Phone)
HOME PAGE: http://www.comm.virginia.edu/faculty_research/staff_directory/sandas.html
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