On the hidden side of liquidity

Angel Pardo and Roberto Pascual

The European Journal of Finance, 2012, vol. 18, issue 10, 949-967

Abstract: This article deals with the informativeness of iceberg orders, also known as hidden limit orders (HLOs). Namely, we analyze how the market reacts when the presence of hidden volume in the limit order book is revealed by the trading process. We use high-frequency book and transaction data from the Spanish Stock Exchange, including a large sample of executed HLOs. We show that just when hidden volume is detected, traders on the opposite side of the market become more aggressive, exploiting the opportunity to consume more than expected at the best quotes. However, neither illiquidity nor volatility increases in the short term. Furthermore, the detection of hidden volume has no relevant price impact. Overall, our results suggest that market participants do not attribute any relevant information content to the hidden side of liquidity.

Date: 2012
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DOI: 10.1080/1351847X.2011.601641

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