Hidden Liquidity: Order Exposure Strategies Around Earnings Announcements

Posted: 8 Jul 2008

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: July 2008

Abstract

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

Chakrabarty, Bidisha and Shaw, Kenneth W., Hidden Liquidity: Order Exposure Strategies Around Earnings Announcements (July 2008). Journal of Business, Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1156872

Bidisha Chakrabarty (Contact Author)

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
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HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy ( email )

420 Cornell Hall
Columbia, MO 65211
United States
573-882-5939 (Phone)
573-882-2437 (Fax)

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