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The dampening effect of iceberg orders on small traders’ welfare

Author

Listed:
  • Laura Delaney

    (City University)

  • Polina Kovaleva

    (City University)

Abstract

Iceberg orders, which allow traders to hide a portion of their order size, have become prevalent in many electronic limit order markets. This paper investigates, via a real options analysis, whether small traders, who have no use for submitting iceberg orders, are better off submitting their orders to fully transparent markets which have low depth, or to more liquid markets which do permit the placement of iceberg orders by large traders. Surprisingly, we find that in the context of our model, small traders are better off submitting to fully transparent markets in spite of them being less liquid.

Suggested Citation

  • Laura Delaney & Polina Kovaleva, 2017. "The dampening effect of iceberg orders on small traders’ welfare," Annals of Finance, Springer, vol. 13(4), pages 453-484, November.
    • Handle: RePEc:kap:annfin:v:13:y:2017:i:4:d:10.1007_s10436-017-0304-1
    DOI: 10.1007/s10436-017-0304-1
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    References listed on IDEAS

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    Cited by:

    1. Delaney, Laura, 2019. "Symmetric equilibrium strategies in game theoretic real option models with incomplete information," Economics Letters, Elsevier, vol. 174(C), pages 42-47.

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    More about this item

    Keywords

    Optimal timing; Iceberg orders; Limit order book; Welfare;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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