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On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements

43 Pages Posted: 13 Feb 2012  

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS)

Ruihong Huang

Humboldt University of Berlin

Date Written: February 8, 2012

Abstract

Trading under limited pre-trade transparency becomes increasingly popular on financial markets. We provide first evidence on traders' use of (completely) hidden orders which might be placed even inside of the (displayed) bid-ask spread. Employing TotalView-ITCH data on order messages at NASDAQ, we propose a simple method to conduct statistical inference on the location of hidden depth and to test economic hypotheses. Analyzing a wide cross-section of stocks, we show that market conditions reflected by the (visible) bid-ask spread, (visible) depth, recent price movements and trading signals significantly affect the aggressiveness of 'dark' liquidity supply and thus the 'hidden spread'. Our evidence suggests that traders balance hidden order placements to (i) compete for the provision of (hidden) liquidity and (ii) protect themselves against adverse selection, front-running as well as 'hidden order detection strategies' used by high-frequency traders. Accordingly, our results show that hidden liquidity locations are predictable given the observable state of the market.

Keywords: limit order market, hidden liquidity, high-frequency trading, non-display order, iceberg orders

JEL Classification: G14, C24, C25, G17

Suggested Citation

Hautsch, Nikolaus and Huang, Ruihong, On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements (February 8, 2012). Available at SSRN: https://ssrn.com/abstract=2004231 or http://dx.doi.org/10.2139/ssrn.2004231

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Ruihong Huang (Contact Author)

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

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