On the dark side of the market: identifying and analyzing hidden order placements

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)
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.
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Metadaten
Author:Nikolaus Hautsch, Ruihong Huang
URN:urn:nbn:de:hebis:30:3-240852
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2012,4
Series (Serial Number):CFS working paper series (2012, 04)
Publisher:Goethe-Univ., House of Finance, Center for Financial Studies
Place of publication:Frankfurt am Main
Document Type:Working Paper
Language:English
Year of Completion:2012
Year of first Publication:2012
Publishing Institution:Univ.-Bibliothek Frankfurt am Main
Release Date:2012/04/03
Tag:Hidden Liquidity; High-Frequency Trading; Iceberg Orders; Limit Order Market; Non-Display Order
Issue:Version February 2012
Pagenumber:46
HeBIS PPN:311803326
Institutes:Center for Financial Studies (CFS)
Dewey Decimal Classification:330 Wirtschaft
JEL-Classification:C24 Truncated and Censored Models
C25 Discrete Regression and Qualitative Choice Models; Discrete Regressors (Updated!)
G14 Information and Market Efficiency; Event Studies
G17 Financial Forecasting (Updated!)
Sammlungen:Universitätspublikationen
Licence (German):License Logo Veröffentlichungsvertrag für Publikationen

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