Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?

Arbeitspapier

We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hidden liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illustrate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Discussion Paper ; No. 28

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: Hidden liquidity ; trade synchronization ; trading frictions ; counterparty attraction ; limit order book

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cebirogly, Gökhan ; Hautsch, Nikolaus ; Horst, Ulrich
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition
• (where): München und Berlin
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/185698
• Last update: 10.03.2025, 11:46 AM CET