Transparency in Fragmented Markets: Experimental Evidence
40 Pages Posted: 15 Sep 2020 Last revised: 16 Feb 2021
Date Written: August 4, 2020
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: Suggested Citation