Order Exposure in High Frequency Markets

53 Pages Posted: 21 Nov 2017 Last revised: 22 Jun 2020

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Samarpan Nawn

Indian Institute of Management Udaipur; CFA Institute

Roberto Pascual

Universidad de las Islas Baleares

Date Written: June 21, 2020

Abstract

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

Suggested Citation

Chakrabarty, Bidisha and Hendershott, Terrence J. and Nawn, Samarpan and Pascual Gascó, Roberto, Order Exposure in High Frequency Markets (June 21, 2020). Available at SSRN: https://ssrn.com/abstract=3074049 or http://dx.doi.org/10.2139/ssrn.3074049

Bidisha Chakrabarty (Contact Author)

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Samarpan Nawn

Indian Institute of Management Udaipur ( email )

Balicha
Udaipur, Rajasthan 313001
India

CFA Institute ( email )

915 East High Street
Charlottesville, VA 22902
United States

Roberto Pascual Gascó

Universidad de las Islas Baleares ( email )

Ctra. de Valldemossa km 7,5
Departamento de Economia y Empresa
Palma, Baleares
Spain
+34 971 17 13 29 (Phone)
+34 971 17 23 89 (Fax)

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