Order exposure and liquidity coordination : does hidden liquidity harm price efficiency?

Gökhan Cebiroglu; Nikolaus Hautsch; Ulrich Horst

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.

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Year of publication:	2014
Authors:	Cebiroglu, Gökhan ; Hautsch, Nikolaus ; Horst, Ulrich
Publisher:	Frankfurt, Main : Center for Financial Studies
Subject:	liquidity externalities \| order flow \| trade signaling \| limit order book \| Wertpapierhandel \| Securities trading \| Liquidität \| Liquidity \| Theorie \| Theory \| Börsenkurs \| Share price \| Marktliquidität \| Market liquidity \| Marktmikrostruktur \| Market microstructure \| Asymmetrische Information \| Asymmetric information \| Betriebliche Liquidität \| Corporate liquidity \| Geld-Brief-Spanne \| Bid-ask spread \| Handelsvolumen der Börse \| Trading volume \| Schätzung \| Estimation \| Börsenhandel \| Stock exchange trading