Why Do Traders Choose to Trade Anonymously?
45 Pages Posted: 28 Feb 2011
Date Written: February 24, 2011
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: Suggested Citation