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Undisclosed orders and optimal submission strategies in a limit order market

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  • Buti, Sabrina
  • Rindi, Barbara

Abstract

Reserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This paper outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders and simultaneously set price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always benefit from reserve orders, whereas small traders benefit only when the tick size is large.

Suggested Citation

  • Buti, Sabrina & Rindi, Barbara, 2013. "Undisclosed orders and optimal submission strategies in a limit order market," Journal of Financial Economics, Elsevier, vol. 109(3), pages 797-812.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:797-812
    DOI: 10.1016/j.jfineco.2013.04.002
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    References listed on IDEAS

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    1. repec:eee:jfinec:v:124:y:2017:i:2:p:244-265 is not listed on IDEAS
    2. repec:cty:dpaper:8121 is not listed on IDEAS
    3. Martin Dierker & Jung-Wook Kim & Jason Lee & Randall Morck, 2016. "Investors’ Interacting Demand and Supply Curves for Common Stocks," Review of Finance, European Finance Association, vol. 20(4), pages 1517-1547.
    4. Cebiroğlu, Gökhan & Horst, Ulrich, 2015. "Optimal order display in limit order markets with liquidity competition," Journal of Economic Dynamics and Control, Elsevier, vol. 58(C), pages 81-100.
    5. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2014. "Dark Pool Trading Strategies, Market Quality and Welfare," Working Papers 530, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    6. Cebiroglu, Gökhan & Hautsch, Nikolaus & Horst, Ulrich, 2014. "Order exposure and liquidity coordination: Does hidden liquidity harm price efficiency?," CFS Working Paper Series 468, Center for Financial Studies (CFS).
    7. repec:kap:annfin:v:13:y:2017:i:4:d:10.1007_s10436-017-0304-1 is not listed on IDEAS
    8. Kovaleva, Polina & Iori, Giulia, 2015. "The impact of reduced pre-trade transparency regimes on market quality," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 145-162.
    9. repec:wsi:qjfxxx:v:07:y:2017:i:03:n:s2010139217500070 is not listed on IDEAS
    10. Foley, Sean & Putniņš, Tālis J., 2016. "Should we be afraid of the dark? Dark trading and market quality," Journal of Financial Economics, Elsevier, vol. 122(3), pages 456-481.

    More about this item

    Keywords

    Reserve orders; Limit order book; Liquidity; Welfare;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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