Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers
Forthcoming, Review of Financial Studies
56 Pages Posted: 8 Sep 2011 Last revised: 18 Oct 2012
Date Written: August 2012
Abstract
We examine the impact on the quality of a securities market of hiding versus displaying orders that provide liquidity. Display expropriates informational rents from informed agents who trade as liquidity providers. The informed then exit liquidity provision in favor of demanding liquidity where they trade less aggressively. Trading costs to uninformed liquidity demanders are higher, bid-ask spreads are wider and midquotes are less informationally ecient when orders that provide liquidity are displayed. Our analysis suggests that market innovations, which might seem to favor the informed over the uninformed, can enhance market quality by intensifying competition among the informed.
Keywords: Informed Trading, Liquidity Provision, Hidden Orders
JEL Classification: D43, 44, 82, 14, 18
Suggested Citation: Suggested Citation
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