Hidden liquidity, market quality, and order submission strategies

Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that sp...

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Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2022-11, Vol.61, p.100739, Article 100739
Main Authors: Lee, Albert J., Chung, Kee H.
Format: Article
Language:English
Subjects:
Algorithmic trading
Dark pools
Hidden liquidity
Order aggressiveness
Pricing efficiency
Tick size pilot program
Undisclosed orders
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Summary:Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity. •Hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies.•Spreads, depths, trading volume, and trade size increase with hidden liquidity.•The extent of informed trading and price impact increase with hidden liquidity on lit venues.•Algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2022.100739