Hidden Limit Orders and Liquidity in Order Driven Markets
AbstractThis paper analyzes the rationale for the submission of hidden limit orders, and compares opaque and transparent limit order books. In my sequential model, the limit order trader may be informed with some probability. Both informed and large uninformed liquidity suppliers submit hidden orders in order to decrease the informational impact of their large orders, while ensuring a large trading volume. As they cannot adopt such a strategy in the transparent market, I find that pre-trade opacity improves market liquidity, and the welfare of the participants. My model further yields empirical predictions on the use and revelation of hidden orders in opaque markets.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 600.
Date of creation: Mar 2010
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Other versions of this item:
- Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," TSE Working Papers 10-147, Toulouse School of Economics (TSE).
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-22 (All new papers)
- NEP-CTA-2010-05-22 (Contract Theory & Applications)
- NEP-MST-2010-05-22 (Market Microstructure)
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