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

Gökhan Cebiroglu, Nikolaus Hautsch and Ulrich Horst

No 468, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: 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.

Keywords: liquidity externalities; order flow; trade signaling; limit order book (search for similar items in EconPapers)
JEL-codes: G02 G10 G23 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-mst
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https://www.econstor.eu/bitstream/10419/102651/1/798019395.pdf (application/pdf)

Related works:
Working Paper: Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency? (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:468

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