Transparency in fragmented markets: Experimental evidence

Terrence Hendershott, Marvin Wee and Yuanji Wen

Journal of Financial Markets, 2022, vol. 59, issue PA

Abstract: We experimentally examine pre-trade transparency in fragmented limit order markets. Allowing traders to hide their orders encourages limit order usage. This improves measures of liquidity by increasing depth and narrowing spreads. However, because some of this depth is not displayed, market fragmentation may limit traders’ ability to capitalize on the improved liquidity. This happens when traders execute against orders at worse prices than orders in another market, often referred to as “trade-throughs.” In our laboratory setting, increased trade-throughs in a dark market impose costs of similar magnitude to the benefits of increases in depth leaving effective liquidity unchanged.

Keywords: Hidden orders; Iceberg orders; Dark pool trading; Limit order book market; Laboratory test (search for similar items in EconPapers)
JEL-codes: C92 G14 G24 G28 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:59:y:2022:i:pa:s1386418122000258

DOI: 10.1016/j.finmar.2022.100732

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