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Title:Optimal display of Iceberg orders PDF Logo
Authors:Cebiroğlu, Gökhan
Horst, Ulrich
Issue Date:2011
Series/Report no.:SFB 649 discussion paper 2011-057
Abstract:We develop a sequential trade model of Iceberg order execution in a limit order book. The Iceberg-trader has the freedom to expose his trading intentions or (partially) shield the true order size against other market participants. Order exposure can cause drastic market reactions ('market impact') in the end leading to higher transaction costs. On the other hand the Iceberg trader faces a loss-in-priority when he hides his intentions, as most electronic limit order books penalize the usage of hidden liquidity. Thus the Iceberg-trader is faced with the problem to find the right trade-off. Our model provides optimal exposure strategies for Iceberg traders in limit order book markets. In particular, we provide a range of analytical statements that are in line with recent empirical findings on the determinants of trader's exposure strategies. In this framework, we also study the market impact also market impact of limit orders. We provide optimal exposure profiles for a range of hightech stocks from the US S&P500 and how they scale with the state-of-the-book. We finally test the Iceberg's performance against the limit orders and find that Iceberg orders can significantly enhance trade performance by up to 60%.
Subjects:hidden liquidity
Iceberg Orders
limit order book
market impact of limit orders
optimal exposure
trading strategies
Iceberg versus Limit Order
pre-trade transparency
agency-trading
JEL:C51
C60
C67
D01
D4
D49
G1
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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