Hidden liquidity: An analysis of order exposure strategies in electronic stock markets

Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study the costs and benefits of order exposure and test hypotheses regarding hidden order usage using a sample of Euronext-Paris stocks, where hidden orders represent 44% of the...

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Bibliographic Details
Published in:Journal of financial economics 2009-12, Vol.94 (3), p.361-383
Main Authors: Bessembinder, Hendrik, Panayides, Marios, Venkataraman, Kumar
Format: Article
Language:English
Subjects:
Capital stock
Cost benefit analysis
Dark pools
Electronic commerce
Hidden liquidity
Hypotheses
Iceberg orders
Investment policy
Limit order market
Limit order market Trading strategies Hidden liquidity Dark pools Iceberg orders
Liquidity
Online securities trading
Risk management
Securities markets
Securities trading volume
Stock exchange
Stock exchanges
Stock prices
Stock returns
Strategic planning
Studies
Trading strategies
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Summary:Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study the costs and benefits of order exposure and test hypotheses regarding hidden order usage using a sample of Euronext-Paris stocks, where hidden orders represent 44% of the sample order volume. Our results support the hypothesis that hidden orders are associated with a decreased probability of full execution and increased average time to completion, and fail to support the alternate hypothesis that order exposure causes defensive traders to withdraw from the market. However, exposing rather than hiding order size increases average execution costs. We assess the extent to which non-displayed size is truly hidden and document that the presence and magnitude of hidden orders can be predicted to a significant, but imperfect, degree based on observable order attributes, firm characteristics, and market conditions. Overall, the results indicate that the option to hide order size is valuable, in particular, to patient traders.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2009.02.001