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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26511
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| Title: | On the Hidden Side of Liquidity |
| Authors: | Pardo, Ángel
Pascual, Roberto |
| Issue Date: | Nov-2003 |
| Series/Report no.: | FIN-04-004 |
| Abstract: | An important number of stock exchanges allow market participants to
enter limit orders without revealing the full size. However, there is a
lot of controversy over the use and consequences of hidden orders, since
they embrace a complex interaction between order exposure risk, market
liquidity and transparency. Our study focuses on the motives of
submitting undisclosed limit orders to trade as well as on the market
response when the presence of these orders is publicly revealed. Using
data from the Spanish Stock Exchange, we find that hidden orders emerge
in periods of intense trading activity and extremely high liquidity. Our
results find no evidence that the undisclosed volume is used as a
defensive strategy against parasitic traders. On the contrary, we
provide support to the notion that liquidity suppliers use hidden orders
to mitigate adverse selection costs. We also report that hidden orders
temporally increase the aggressiveness of traders when they are revealed
to the marketplace but, as opposed to the widespread opinion among
practitioners, they have no relevant price impact. |
| URI: | http://hdl.handle.net/2451/26511 |
| Appears in Collections: | Finance Working Papers
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