Re-Exploring the Bond and Equity ETF Hidden Liquidity Puzzle: An Intraday Analysis

Abstract

We re-examine the exchange traded funds (ETFs) hidden liquidity puzzle identified by Pan, Van Ness, and Van Ness (2024) using high frequency data. We examine whether differences in trading costs, probability of informed trading (PIN), or pinging activity can explain differences in hidden liquidity between bond and equity ETFs. Using a matched set of bond and equity ETFs, we find that hidden liquidity is significantly higher for bond ETFs than equity ETFs, confirming the findings in Pan, Van Ness, and Van Ness. We find that trading costs are lower for bond ETFs than equity ETFs, but the differences in trading costs do not explain the differences in hidden liquidity. The probability of informed trading and pinging activity are lower for bond ETFs than equity ETFs, but neither can explain differences in hidden liquidity between bond and equity ETFs.

Keywords: Hidden Volume; Hidden Liquidity; ETFs; Exchange Traded Funds; Trading Costs; Probability of Informed Trading; Pinging; Algorithmic Trading

JEL Classification: G10, G12, G14