Order Exposure and Liquidity Coordination: Does Hidden Liquidity Harm Price Efficiency?
Nikolaus Hautsch () and
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Gökhan Cebirogly: University of Vienna
No 28, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition
We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hidden liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illustrate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.
Keywords: Hidden liquidity; trade synchronization; trading frictions; counterparty attraction; limit order book (search for similar items in EconPapers)
JEL-codes: G02 G10 G23 (search for similar items in EconPapers)
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Working Paper: Order exposure and liquidity coordination: Does hidden liquidity harm price efficiency? (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:rco:dpaper:28
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