On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements
43 Pages Posted: 13 Feb 2012
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Hidden Liquidity: An Analysis of Order Exposure Strategies in Electronic Stock Markets
By Hendrik Bessembinder, Marios A. Panayides, ...
-
The Impact of Iceberg Orders in Limit Order Books
By Stefan Frey and Patrik Sandås
-
Hidden Liquidity: Some New Light on Dark Trading
By Robert J. Bloomfield, Maureen O'hara, ...
-
Supply and Information Content of Order Book Depth: The Case of Displayed and Hidden Depth
By Klaus Belter
-
Optimal Order Exposure and the Market Impact of Limit Orders
By Gökhan Cebiroglu and Ulrich Horst
-
Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers
By Alex Boulatov and Thomas J. George
-
Does Hidden Liquidity Harm Price Efficiency?
By Gökhan Cebiroglu, Nikolaus Hautsch, ...
-
The Friction-Free Weighted Price Contribution
By David Abad and Roberto Pascual
-
Informed Trading and Price Discovery before Corporate Events
By Shmuel Baruch, Marios A. Panayides, ...