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

Gökhan Cebirogly (University of Vienna), Nikolaus Hautsch (University of Vienna), Ulrich Horst (Humboldt University Berlin)

We show that the excessive use of hidden orders causes artificial price pressures and abnormal asset returns. Using a simple game-theoretical setting, we demonstrate that this effect naturally arises from mis-coordination in trading schedules between traders, when suppliers of liquidity do not sufficiently disclose their trade intentions. As a result, hidden liquidity can increase trading costs and induce excess price fluctuations unrelated to information. Using NASDAQ order book data, we find strong empirical support and illustrate that hidden liquidity is higher if bid-ask spreads are smaller and relative tick sizes are higher.

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Year of publication:	2017
Authors:	Cebirogly, Gökhan ; Hautsch, Nikolaus ; Horst, Ulrich
Publisher:	Munich, Germany : Collaborative Research Center Transregio 190
Subject:	hidden liquidity \| trade synchronization \| trading frictions \| counterparty attraction \| limit order book \| Wertpapierhandel \| Securities trading \| Theorie \| Theory \| Liquidität \| Liquidity \| Marktliquidität \| Market liquidity \| Börsenkurs \| Share price \| Geld-Brief-Spanne \| Bid-ask spread \| Schätzung \| Estimation \| Handelsvolumen der Börse \| Trading volume \| Betriebliche Liquidität \| Corporate liquidity \| Elektronisches Handelssystem \| Electronic trading