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Why Do Traders Choose to Trade Anonymously?

Author

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  • Comerton-Forde, Carole
  • Putniņš, Tālis J.
  • Tang, Kar Mei

Abstract

This paper examines the use, determinants, and impact of anonymous orders in a market where disclosure of broker identity in the trading screen is voluntary. We find that most trading occurs nonanonymously, contrary to prior literature that suggests liquidity gravitates to anonymous markets. By strategically using anonymity when it is beneficial, traders reduce their execution costs. Traders select anonymity based on various factors including order source, order size and aggressiveness, time of day, liquidity, and expected execution costs. Finally, we report how anonymous orders affect market quality and discuss implications for market design.

Suggested Citation

  • Comerton-Forde, Carole & Putniņš, Tālis J. & Tang, Kar Mei, 2011. "Why Do Traders Choose to Trade Anonymously?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(4), pages 1025-1049, August.
    • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:04:p:1025-1049_00
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    Citations

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    Cited by:

    1. Degryse, H.A. & van Achter, M. & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Other publications TiSEM 3744cb8d-b4ce-47a1-9abd-f, Tilburg University, School of Economics and Management.
    2. Attig, Najah & El Ghoul, Sadok, 2021. "Flying under the radar: The real effects of anonymous trading," Journal of Corporate Finance, Elsevier, vol. 71(C).
    3. He, Yinghua & Nielsson, Ulf & Guo, Hong & Yang, Jiong, 2014. "Subscribing to transparency," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 189-206.
    4. Anand, Amber & Irvine, Paul & Liu, Tingting, 2019. "Does institutional trading affect underwriting?," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 1-1.
    5. Grimstvedt Meling, Tom, 2017. "Anonymous trading in equities," Working Papers in Economics 7/17, University of Bergen, Department of Economics.
    6. René Carmona & Claire Zeng, 2022. "Optimal Execution with Identity Optionality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 29(4), pages 261-287, July.
    7. Rannou, Yves, 2019. "Limit order books, uninformed traders and commodity derivatives: Insights from the European carbon futures," Economic Modelling, Elsevier, vol. 81(C), pages 387-410.
    8. Dennis, Patrick J. & Sandås, Patrik, 2014. "Does Trading Anonymously Enhance Liquidity?," Working Paper Series 288, Sveriges Riksbank (Central Bank of Sweden).
    9. Wang, Ming-Chang & Ding, Yu-Jia & Chiang, Hsin-Chieh, 2018. "Do enterprise–bank relationships improve market quality? Evidence from Taiwan," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 79-91.
    10. Baldauf, Markus & Mollner, Joshua, 2022. "Fast traders make a quick buck: The role of speed in liquidity provision," Journal of Financial Markets, Elsevier, vol. 58(C).
    11. Tom Grimstvedt Meling, 2021. "Anonymous Trading in Equities," Journal of Finance, American Finance Association, vol. 76(2), pages 707-754, April.
    12. Dennis, Patrick J. & Sandås, Patrik, 2020. "Does Trading Anonymously Enhance Liquidity?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(7), pages 2372-2396, November.
    13. Arzé Karam, 2022. "Dealers' incentives to reveal their names," The Financial Review, Eastern Finance Association, vol. 57(1), pages 27-44, February.

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