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Optimal Order Exposure and the Market Impact of Limit Orders

33 Pages Posted: 2 Feb 2012 Last revised: 21 Feb 2017

Gökhan Cebiroglu

University of Vienna, Faculty of Business and Economics

Ulrich Horst

Humboldt University of Berlin

Date Written: July 30, 2013

Abstract

In limit order book markets, traders face the problem whether to display or hide their orders. While hiding reduces exposure impact, exposing can increase execution priority. Based on order flow dynamics, we develop a structural model that captures this trade-off. A central aspect of this work is the market impact of exposure: exposed limit orders affect incoming order flow. We derive explicit characterizations of the optimal exposure strategy under various market specifications. Using high-resolution ITCH data, we estimate the true impact of the exposure and calculate the optimal exposure for various stocks under high-frequency trading horizons. It turns out that exposure does mainly affect the supply side of liquidity. Our results suggests that the use of hidden orders can significantly increase trade performance.

Keywords: hidden liquidity, Iceberg orders, hidden orders, limit order book, market impact, front-running, transparency, order flow, high-frequency trading

JEL Classification: C51, C60, D01, D4, G1

Suggested Citation

Cebiroglu, Gökhan and Horst, Ulrich, Optimal Order Exposure and the Market Impact of Limit Orders (July 30, 2013). Available at SSRN: https://ssrn.com/abstract=1997092 or http://dx.doi.org/10.2139/ssrn.1997092

Gökhan Cebiroglu (Contact Author)

University of Vienna, Faculty of Business and Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria
+43-1-4277-38682 (Phone)

Ulrich Horst

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

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