Pre-Trade Transparency and Informed Trading: Experimental Evidence on Undisclosed Orders

65 Pages Posted: 15 Mar 2010 Last revised: 29 Oct 2015

Arie Eskenazi Gozluklu

University of Warwick

Date Written: October 16, 2015

Abstract

We use experimental asset markets to analyze trading under different transparency and information settings. We …find that both liquidity and informed traders use undisclosed orders to compete for liquidity provision. In opaque markets, traders increase aggressiveness to improve execution probability. Without information friction, opacity enhances liquidity, especially toward the end of trading, and is beneficial for liquidity traders. Under informed trading, adverse selection drives market outcomes mainly around news announcements. Monopolistic insiders exploit opacity at the expense of large liquidity traders. Opacity does not affect informational efficiency with a monopolistic insider, but value discovery is faster with shared informational rents.

Keywords: Undisclosed orders, hidden liquidity, information asymmetry, market opacity, insider trading

JEL Classification: C91, C92, G28

Suggested Citation

Gozluklu, Arie Eskenazi, Pre-Trade Transparency and Informed Trading: Experimental Evidence on Undisclosed Orders (October 16, 2015). Available at SSRN: https://ssrn.com/abstract=1570113 or http://dx.doi.org/10.2139/ssrn.1570113

Arie Eskenazi Gozluklu (Contact Author)

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

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