Anonymity and the Information Content of the Limit Order Book

We investigate the effect of broker anonymity on the information content of the limit order book on the Australian Stock Exchange. We argue that the move to anonymity has stronger impact on institutional than individual investors. We document that anonymity increases the informativeness of institutional limit orders about future volatility but has little effect on individual limit orders. Our findings imply that anonymity allows institutional investors to display informative orders in the limit order book. Prices, however, adjust less sufficiently to institutional investors’ order flow. Overall, anonymity may improve liquidity but it comes at the cost of reduced price efficiency.