Hidden Liquidity: Some New Light on Dark Trading

63 Pages Posted: 11 Mar 2012 Last revised: 12 May 2014

See all articles by Robert J. Bloomfield

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: May 7, 2014

Abstract

We use a laboratory market to investigate how the ability to hide orders affects traders’ strategies and market outcomes in a limit order book environment. We find that order strategies are greatly affected by allowing hidden liquidity, with traders substituting non-displayed for displayed shares and changing the aggressiveness of their trading. As traders adapt their behavior to the different opacity regimes, however, most aggregate market outcomes (such as liquidity and informational efficiency) are not affected as much. We also find that opacity appears to increase the profits of informed traders but only when their private information is very valuable.

Keywords: transparency, dark liquidity, hidden liquidity, iceberg markets, experiments, liquidity, informational efficiency, market microstructure

JEL Classification: G10, G18, C92

Suggested Citation

Bloomfield, Robert J. and O'Hara, Maureen and Saar, Gideon, Hidden Liquidity: Some New Light on Dark Trading (May 7, 2014). Johnson School Research Paper Series No. 15-2012. Available at SSRN: https://ssrn.com/abstract=2019235 or http://dx.doi.org/10.2139/ssrn.2019235

Robert J. Bloomfield

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

450 Sage Hall
Ithaca, NY 14853
United States
607-255-9407 (Phone)
607-254-4590 (Fax)

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Register to save articles to
your library

Register

Paper statistics

Downloads
425
Abstract Views
8,069
rank
23,194
PlumX Metrics