Hidden Liquidity, Market Quality, and Order Submission Strategies

118 Pages Posted: 30 Jun 2020 Last revised: 25 Apr 2022

See all articles by Albert J. Lee

Albert J. Lee

Hanyang University

Kee H. Chung

State University of New York at Buffalo - School of Management

Date Written: June 5, 2020

Abstract

Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.

Keywords: Hidden liquidity, Tick Size Pilot Program, Undisclosed orders, Dark pools, Order aggressiveness, Algorithmic trading, Pricing efficiency

JEL Classification: G14, G18, G28

Suggested Citation

Lee, Albert and Chung, Kee H., Hidden Liquidity, Market Quality, and Order Submission Strategies (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=3620114 or http://dx.doi.org/10.2139/ssrn.3620114

Albert Lee

Hanyang University ( email )

Seoul
Korea, Republic of (South Korea)

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

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