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

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SFB 649 Discussion Paper ; No. 2012-014

Classification and Topics

• Classification: Wirtschaft ; Information and Market Efficiency; Event Studies; Insider Trading ; Single Equation Models; Single Variables: Truncated and Censored Models; Switching Regression Models; Threshold Regression Models ; Single Equation Models; Single Variables: Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities ; Financial Forecasting and Simulation
• Subject: limit order market ; hidden liquidity ; high-frequency trading ; non-display order ; iceberg orders ; Wertpapierhandel ; Marktliquidität ; Börsenumsatz ; Mikrostrukturanalyse ; Aktienmarkt ; USA

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hautsch, Nikolaus ; Huang, Ruihong
• Event: Veröffentlichung
• (who): Humboldt University of Berlin, Collaborative Research Center 649 - Economic Risk
• (where): Berlin
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/56742
• Last update: 10.03.2025, 11:44 AM CET