Order Exposure in High Frequency Markets
53 Pages Posted: 21 Nov 2017 Last revised: 22 Jun 2020
Date Written: June 21, 2020
We examine how traders’ technology and motivation to trade impact transparency. We show that algorithmic traders (ATs) are more likely to hide orders and their hidden orders receive better execution. High frequency traders (HFTs, a subset of ATs) extensively use small hidden orders that are aggressively priced near the best quotes. Theory suggests that traders hide orders to limit their option value, delay information exposure, and limit competition for liquidity provision. Our results suggest that HFTs hide orders to limit competition when the expected profitability of liquidity provision is higher, while non-algorithmic traders hide orders to limit their option value..
Keywords: Hidden orders, high frequency trading, order exposure
JEL Classification: G11, G12, G14, G15, G24
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