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Hidden Limit Orders and Liquidity in Order Driven Markets

Sophie Moinas

No 10-147, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper analyzes the rationale for the submission of hidden limit orders, and compares opaque and transparent limit order books. In my sequential model, the limit order trader may be informed with some probability. Both informed and large uninformed liquidity suppliers submit hidden orders in order to decrease the informational impact of their large orders, while ensuring a large trading volume. As they cannot adopt such a strategy in the transparent market, I find that pre-trade opacity improves market liquidity, and the welfare of the participants. My model further yields empirical predictions on the use and revelation of hidden orders in opaque markets.

JEL-codes: G10 G14 G18 (search for similar items in EconPapers)
Date: 2010-03
New Economics Papers: this item is included in nep-cta and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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