Order exposure and liquidity coordination: Does hidden liquidity harm price efficiency?

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 468

Classification and Topics

• Classification: Wirtschaft ; General Financial Markets: General (includes Measurement and Data) ; Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
• Subject: liquidity externalities ; order flow ; trade signaling ; limit order book

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cebiroglu, Gökhan ; Hautsch, Nikolaus ; Horst, Ulrich
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102651
• Last update: 10.03.2025, 11:44 AM CET