Order Exposure in High Frequency Markets

Abstract

We examine hidden orders usage by algorithmic traders (ATs) and non-ATs. ATs extensively use hidden orders but of smaller size than non-ATs, who are the primary contributors to hidden volume. ATs’ relative share of hidden volume decreases with volatility, adverse selection costs, and the relative tick-size. Proprietary ATs (HFTs), who differ from agency ATs (AATs) in their information sets and potential gains from trade, hide orders to reduce competition for liquidity provision, whereas AATs use hidden orders to conceal information in their more informed orders and manage picking off risk. Finally, superior technology provides limited benefit for hidden order execution.

Keywords: Hidden orders, transparency, high frequency trading, order exposure JEL Classification: G11, G12, G14, G15, G24

JEL Classification: G11, G12, G14, G15, G24