Hidden Liquidity: Order Exposure Strategies Around Earnings Announcements
Posted: 8 Jul 2008
Date Written: July 2008
Electronic limit order books are prevalent in financial markets. Most allow "hidden orders," in which the order's information is neither revealed to the market nor reflected in the National Best Bid and Offer quotes. Hidden orders comprise a large portion of the trading activity in many stocks. While they enable traders to conceal information, hidden orders lose time priority to displayed orders, and thus face increased risk of non-execution. We examine hidden order activity around earnings announcements, a time when demand for the opacity of hidden orders is likely high, due to heightened private information acquisition, but demand for immediate trade execution is also likely high due to increased trading activity. We find that hidden order volume, the number of hidden orders executed, hidden order trade size, and the full size of hidden orders executed all increase around earnings announcements. This suggests hidden orders provide significant liquidity at a time when quoted liquidity typically falls. We also show that changes in hidden order activity at earnings announcements are related to cross-sectional variation in the firm's pre-announcement information environment, the information conveyed by the earnings announcement, and changes in quoted liquidity.
Keywords: Hidden Orders, ECNs, Earnings announcement
JEL Classification: G10, G14
Suggested Citation: Suggested Citation