Does Anonymity Matter in Electronic Limit Order Markets?

61 Pages Posted: 4 Dec 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: October 2003


We analyse the effect of concealing limit order traders' identities on market liquidity. We develop a model in which limit order traders have asymmetric information on the cost of limit order trading (which is determined by the exposure to informed trading). A thin limit order book signals to uninformed bidders that the profitability of limit orders is small. This deters uninformed bidders from improving upon the posted quotes. Informed bidders exploit this effect by bidding as if the cost of liquidity provision were large when indeed it is small. This bluffing strategy is less effective when traders cannot distinguish between informative and uninformative limit orders. Hence informed bidders act more competitively in the anonymous market. 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: Market microstructure, limit order trading, anonymity, transparency, liquidity

JEL Classification: G10, G14, G24

Suggested Citation

Foucault, Thierry and Moinas, Sophie and Theissen, Erik, Does Anonymity Matter in Electronic Limit Order Markets? (October 2003). Available at SSRN:

Thierry Foucault (Contact Author)

HEC Paris - Finance Department ( email )

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


Sophie Moinas

Toulouse School of Economics ( email )

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

Erik Theissen

University of Mannheim - Finance Area ( email )

Mannheim, 68131

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