Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers

Boulatov, Alex; George, Thomas J.

doi:10.2139/ssrn.1923946

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

See all articles by Alex Boulatov

Alex Boulatov

HSE Moscow; University of Houston - C.T. Bauer College of Business

Thomas J. George

University of Houston - Department of Finance

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

Boulatov, Alex and George, Thomas J., Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers (August 2012). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=1923946 or http://dx.doi.org/10.2139/ssrn.1923946