Refine
Document Type
- Working Paper (2) (remove)
Language
- English (2) (remove)
Has Fulltext
- yes (2)
Is part of the Bibliography
- no (2)
Keywords
- limit order book (2) (remove)
Institute
- Wirtschaftswissenschaften (2) (remove)
Revisiting the stealth trading hypothesis: does time-varying liquidity explain the size-effect?
(2019)
Large trades have a smaller price impact per share than medium-sized trades. So far, the literature has attributed this effect to the informational content of trades. In this paper, we show that this effect can arise from strategic order placement. We introduce the concept of a liquidity elasticity, measuring the responsiveness of liquidity demand with respect to changes in liquidity supply, as a major driver for a declining price impact per share. Empirical evidence based on Nasdaq stocks strongly supports theoretical predictions and shows that the aspect of liquidity coordination is an important complement to rationales based on asymmetric information.
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.