Hide-and-Seek in the Market: Placing and Detecting Hidden Orders
(2007) Review of Finance — Vol. 11 (2007)
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- Authors
- Abstract
- (en) This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, we provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, we show that hidden depth increases order aggressiveness. Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detect hidden volume at the best opposite quote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement.
- Affiliations
Louvain School of Management Accounting & Finance
Citations
De Winne, R., & D’Hondt, C. (2007). Hide-and-Seek in the Market: Placing and Detecting Hidden Orders. Review of Finance, 11. (Original work published 2007)