Revisiting the Stealth Trading Hypothesis: Does Time-Varying Liquidity Explain the Size-Effect?

58 Pages Posted: 7 Sep 2019

See all articles by Gökhan Cebiroglu

Gökhan Cebiroglu

University of Vienna, Faculty of Business and Economics

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Christopher Walsh

TU Dortmund University

Date Written: September 1, 2019

Abstract

Large trades have a smaller price impact per share than medium-sized trades. So far, the literature has attributed this effect to the informational content of trades. In this paper, we show that this effect can arise from strategic order placement. We introduce the concept of a liquidity elasticity, measuring the responsiveness of liquidity demand with respect to changes in liquidity supply, as a major driver for a declining price impact per share. Empirical evidence based on Nasdaq stocks strongly supports theoretical predictions and shows that the aspect of liquidity coordination is an important complement to rationales based on asymmetric information.

Keywords: stealth trading, price impact, liquidity elasticity, limit order book

JEL Classification: G02, G10, G23

Suggested Citation

Cebiroglu, Gökhan and Hautsch, Nikolaus and Walsh, Christopher, Revisiting the Stealth Trading Hypothesis: Does Time-Varying Liquidity Explain the Size-Effect? (September 1, 2019). CFS Working Paper, No. 625, 2019. Available at SSRN: https://ssrn.com/abstract=3446394

Gökhan Cebiroglu

University of Vienna, Faculty of Business and Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria
+43-1-4277-38682 (Phone)

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

Christopher Walsh

TU Dortmund University ( email )

Friedrich-Wöhler-Weg 6
Dortmund, 44227
Germany

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