Transparency in Fragmented Markets: Experimental Evidence

40 Pages Posted: 15 Sep 2020 Last revised: 16 Feb 2021

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Marvin Wee

Australian National University (ANU); Financial Research Network (FIRN)

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance

Date Written: August 4, 2020

Abstract

We experimentally examine pre-trade transparency in fragmented limit-order markets. Allowing traders to hide their orders encourages limit order usage. This improves measures of liquidity by increasing depth and narrowing spreads. However, because some of this depth is not displayed, market fragmentation may limit traders’ ability to capitalize on the improved liquidity. This happens when traders execute against displayed orders at worse prices than hidden orders in another market, often referred to as ‘trade-throughs.’ In our laboratory setting, increased trade-throughs due to a dark market impose costs of similar magnitude to the benefits of increases in depth leaving
effective liquidity unchanged.

Keywords: hidden orders, iceberg orders, dark pool trading, limit order book market, laboratory test

JEL Classification: C92, G14, G24, G28

Suggested Citation

Hendershott, Terrence J. and Wee, Marvin and Wen, Yuanji, Transparency in Fragmented Markets: Experimental Evidence (August 4, 2020). Available at SSRN: https://ssrn.com/abstract=3666983 or http://dx.doi.org/10.2139/ssrn.3666983

Terrence J. Hendershott (Contact Author)

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

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

Marvin Wee

Australian National University (ANU) ( email )

The Australian National University
College of Business and Economics
Canberra, 2601
Australia
+61 2 61250416 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

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