On the dark side of the market: Identifying and analyzing hidden order placements
Trading under limited pre-trade transparency becomes increasingly popular on financial markets. We provide first evidence on traders' use of (completely) hidden orders which might be placed even inside of the (displayed) bid-ask spread. Employing TotalView-ITCH data on order messages at NASDAQ, we propose a simple method to conduct statistical inference on the location of hidden depth and to test economic hypotheses. Analyzing a wide cross-section of stocks, we show that market conditions reflected by the (visible) bid-ask spread, (visible) depth, recent price movements and trading signals significantly affect the aggressiveness of 'dark' liquidity supply and thus the 'hidden spread'. Our evidence suggests that traders balance hidden order placements to (i) compete for the provision of (hidden) liquidity and (ii) protect themselves against adverse selection, front-running as well as 'hidden order detection strategies' used by high-frequency traders. Accordingly, our results show that hidden liquidity locations are predictable given the observable state of the market.
|Date of creation:||2012|
|Date of revision:|
|Contact details of provider:|| Postal: House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main|
Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hautsch, Nikolaus & Huang, Ruihong, 2009.
"The market impact of a limit order,"
CFS Working Paper Series
2009/23, Center for Financial Studies (CFS).
- Michael Fleming & Bruce Mizrach, 2008.
"The Microstructure of a U.S. Treasury ECN: The Brokertec Platform,"
Departmental Working Papers
200803, Rutgers University, Department of Economics.
- Fleming, Michael J. & Mizrach, Bruce & Nguyen, Giang, 2009. "The microstructure of a U.S. Treasury ECN: the BrokerTec platform," Staff Reports 381, Federal Reserve Bank of New York, revised 01 Aug 2016.
- Bessembinder, Hendrik & Panayides, Marios & Venkataraman, Kumar, 2009. "Hidden liquidity: An analysis of order exposure strategies in electronic stock markets," Journal of Financial Economics, Elsevier, vol. 94(3), pages 361-383, December.
- Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-35.
- Aitken, Michael J. & Berkman, Henk & Mak, Derek, 2001. "The use of undisclosed limit orders on the Australian Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1589-1603, August.
- Angel Pardo & Roberto Pascual, 2012. "On the hidden side of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 949-967, November.
- Moinas, Sophie, 2010.
"Hidden Limit Orders and Liquidity in Order Driven Markets,"
IDEI Working Papers
600, Institut d'Économie Industrielle (IDEI), Toulouse.
- Moinas, Sophie, 2010. "Hidden Limit Orders and Liquidity in Order Driven Markets," TSE Working Papers 10-147, Toulouse School of Economics (TSE).
- Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
- 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.
- Esser, Angelika & Monch, Burkart, 2007. "The navigation of an iceberg: The optimal use of hidden orders," Finance Research Letters, Elsevier, vol. 4(2), pages 68-81, June.
- Frey, Stefan & Sandås, Patrik, 2009. "The impact of iceberg orders in limit order books," CFR Working Papers 09-06, University of Cologne, Centre for Financial Research (CFR).
- Anand, Amber & Weaver, Daniel G., 2004. "Can order exposure be mandated?," Journal of Financial Markets, Elsevier, vol. 7(4), pages 405-426, October.
- Rudy De Winne & Catherine D'hondt, 2007. "Hide-and-Seek in the Market: Placing and Detecting Hidden Orders," Review of Finance, European Finance Association, vol. 11(4), pages 663-692.
- Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May.
When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:201204. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.