Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102651
Authors: 
Cebiroglu, Gökhan
Hautsch, Nikolaus
Horst, Ulrich
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper Series 468
Abstract: 
We develop a model of an order-driven exchange competing for order flow with off-exchange trading mechanisms. Liquidity suppliers face a trade-off between benefits and costs of order exposure. If they display trading intentions, they attract additional trade demand. We show, in equilibrium, hiding trade intentions can induce mis-coordination between liquidity supply and demand, generate excess price fluctuations and harm price efficiency. Econometric high-frequency analysis based on unique data on hidden orders from NASDAQ reveals strong empirical support for these predictions: We find abnormal reactions in prices and order flow after periods of high excess-supply of hidden liquidity.
Subjects: 
liquidity externalities
order flow
trade signaling
limit order book
JEL: 
G02
G10
G23
Document Type: 
Working Paper

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