Order exposure and liquidity coordination: does hidden liquidity harm price efficiency?
- We develop a model of an order-driven exchange competing for order flow with off-exchange trading mechanisms. Liquidity suppliers face a trade-off between benefits and costs of order exposure. If they display trading intentions, they attract additional trade demand. We show, in equilibrium, hiding trade intentions can induce mis-coordination between liquidity supply and demand, generate excess price fluctuations and harm price efficiency. Econometric high-frequency analysis based on unique data on hidden orders from NASDAQ reveals strong empirical support for these predictions: We find abnormal reactions in prices and order flow after periods of high excess-supply of hidden liquidity.
| Author: | Gökhan CebirogluGND, Nikolaus HautschORCiDGND, Ulrich HorstGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-350883 |
| URL: | http://ssrn.com/abstract=2504549 |
| DOI: | https://doi.org/10.2139/ssrn.2504549 |
| Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 468 |
| Series (Serial Number): | CFS working paper series (468) |
| Publisher: | Center for Financial Studies |
| Place of publication: | Frankfurt, M. |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2014 |
| Year of first Publication: | 2014 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2014/10/20 |
| Tag: | limit order book liquidity externalities; order flow; trade signaling |
| Issue: | September 18, 2014 |
| Page Number: | 60 |
| HeBIS-PPN: | 351155309 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
