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Undisclosed Orders and Optimal Submission Strategies in a Dynamic Limit Order Market

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  • Sabrina Buti
  • Barbara Rindi

Abstract

Recent evidence on electronic limit order markets shows a growing use of undisclosed orders. This paper offers a theory for the optimal submission strategy in a limit order book where traders simultaneously select price, quantity and exposure, and choose among limit, market, reserve (partially undisclosed) and hidden (totally invisible) orders. Our findings show that to compete for the provision of liquidity in shallow markets relatively patient traders use reserve orders, whilst aggressive traders use hidden pegged orders to undercut depth at the top of liquid books. Undisclosed orders are effective defensive strategies against front running by parasitic traders, whereas they protect against picking-off by scalpers only in slow markets where Fill&Kill orders are not used. Finally, our results show that undisclosed orders increase market depth on the top of the book, but widen the inside spread; as a result they can benefit institutional investors but harm retail traders.

Suggested Citation

  • Sabrina Buti & Barbara Rindi, 2011. "Undisclosed Orders and Optimal Submission Strategies in a Dynamic Limit Order Market," Working Papers 389, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:389
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    Cited by:

    1. Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," IDEI Working Papers 600, Institut d'Économie Industrielle (IDEI), Toulouse.
    2. Sabrina Buti & Barbara Rindi & Ingrid M. Werner, 2011. "Dark Pool Trading Strategies," Working Papers 421, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Kandel, Eugene & Rindi, Barbara & Bosetti, Luisella, 2012. "The effect of a closing call auction on market quality and trading strategies," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 23-49.
    4. Fuchs, William & Öry, Aniko & Skrzypacz, Andrzej, 2016. "Transparency and distressed sales under asymmetric information," Theoretical Economics, Econometric Society, vol. 11(3), September.
    5. Gökhan Cebiroglu & Ulrich Horst, 2012. "Hidden Liquidity: Determinants and Impact," SFB 649 Discussion Papers SFB649DP2012-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Romans Pancs, 2014. "Workup," Review of Economic Design, Springer;Society for Economic Design, vol. 18(1), pages 37-71, March.
    7. Nikolaus Hautsch & Ruihong Huang, 2012. "On the Dark Side of the Market: Identifying and Analyzing Hidden Order Placements," SFB 649 Discussion Papers SFB649DP2012-014, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    8. Alex Boulatov & Thomas J. George, 2013. "Hidden and Displayed Liquidity in Securities Markets with Informed Liquidity Providers," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 2096-2137.
    9. : Arie E. Gozluklu, 2012. "Pre-Trade Transparency and Informed Trading an Experimental Approach to Hidden Liquidity," Working Papers wpn12-05, Warwick Business School, Finance Group.

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