Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/57374
Authors: 
Hautsch, Nikolaus
Huang, Ruihong
Year of Publication: 
2012
Series/Report no.: 
CFS Working Paper 2012/04
Abstract: 
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.
Subjects: 
Limit Order Market
Hidden Liquidity
High-Frequency Trading
Non-Display Order
Iceberg Orders
JEL: 
G14
C24
C25
G17
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
692.17 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.