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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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    More about this item

    Keywords

    Reserve orders; Limit order book; Liquidity; Welfare;
    All these keywords.

    JEL classification:

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

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