Does Anonymity Matter in Electronic Limit Order Markets?

58 Pages Posted: 31 Jul 2003

See all articles by Thierry Foucault

Thierry Foucault

HEC Paris - Finance Department

Sophie Moinas

Toulouse School of Economics

Erik Theissen

University of Mannheim - Finance Area

Multiple version iconThere are 3 versions of this paper

Date Written: September 2002

Abstract

We analyze the effect of concealing limit order traders' identities on market liquidity. First we develop a model in which limit order traders have asymmetric information on the true cost of limit order trading (which is determined by the exposure to informed trading). Uninformed bidders draw inferences on this cost from the state of the book. A thin book can be due to untapped profit opportunities or a high cost of limit order trading. The last possibility reduces uninformed bidders' inclination to add depth when the book is thin. Informed bidders exploit this effect by bidding less aggressively than when bidders have symmetric information. However they bid more aggressively when their identities are concealed than when they are disclosed. For this reason, concealing limit order traders' IDs affects market liquidity in our model. We test this prediction using a natural experiment. On April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. We find that following this change, the average quoted spreads declined significantly whereas the quoted depth decreased.

Keywords: Natural Experiment, Limit Order Book, Anonymity, Liquidity

Suggested Citation

Foucault, Thierry and Moinas, Sophie and Theissen, Erik, Does Anonymity Matter in Electronic Limit Order Markets? (September 2002). EFA 2003 Annual Conference Paper No. 377. Available at SSRN: https://ssrn.com/abstract=424962 or http://dx.doi.org/10.2139/ssrn.424962

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Sophie Moinas

Toulouse School of Economics ( email )

Toulouse 1 Capitole University
Place Anatole-France
Toulouse Cedex, F-31042
France

Erik Theissen (Contact Author)

University of Mannheim - Finance Area ( email )

Mannheim, 68131
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
259
Abstract Views
1,941
rank
104,964
PlumX Metrics