Why Do Traders Choose to Trade Anonymously?

45 Pages Posted: 28 Feb 2011

See all articles by Carole Comerton-Forde

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Tālis J. Putniņš

University of Technology Sydney (UTS); Stockholm School of Economics, Riga

Kar Mei Tang

University of Sydney - Discipline of Finance

Date Written: February 24, 2011

Abstract

This paper examines the use, determinants and impact of anonymous orders in a market where disclosure of broker identity in the trading screen is voluntary. We find that most trading occurs non-anonymously, contrary to prior literature that suggests liquidity gravitates to anonymous markets. By strategically using anonymity when it is beneficial, traders reduce their execution costs. Traders select anonymity based on various factors including order source, order size and aggressiveness, time of day, liquidity and expected execution costs. Finally, we report how anonymous orders affect market quality and discuss implications for market design.

Keywords: Anonymity, execution cost, broker identity, strategic trading

JEL Classification: G14, G29

Suggested Citation

Comerton-Forde, Carole and Putnins, Talis J. and Tang, Kar Mei, Why Do Traders Choose to Trade Anonymously? (February 24, 2011). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1769785

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

Kar Mei Tang (Contact Author)

University of Sydney - Discipline of Finance ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

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