Pre-trade transparency and informed trading: Experimental evidence on undisclosed orders

Abstract

I use experimental asset markets to analyze trading under di¤erent transparency and information settings. I …nd that both liquidity and informed traders use undisclosed orders to compete for liquidity provision. In opaque markets, traders increase aggressiveness to improve execution probability. Without information friction, market opacity enhances liquidity, especially toward the end of trading, and is bene…cial for liquidity traders.Under informed trading, adverse selection drives market outcomes mainly around news announcements. Monopolistic insiders exploit opacity at the expense of large liquidity traders. Opacity does not a¤ect informational e¢ ciency with a monopolistic insider, but value discovery is faster when informational rents are shared.(JEL classi…cation: C91, C92, G28)

Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models

“…Angel, Harris and Spatt () suggest that increasing the tick size raises the incentive to display liquidity. However, Gozluklu () suggests that the relative tick size has no influence in the decision to use hidden liquidity. In this paper, we posit that the level of hidden liquidity in the market will decline for pilot stocks after the tick size change.…”

Two Shades of Opacity: Hidden Orders versus Dark Trading

“…Although hiding a part of the trading intention reduces the execution probability of a limit order, reduced competition also decreases overall execution costs for large traders. In an experimental design without asymmetric information Gozluklu (2014) shows that large traders indeed shift to using opaque orders to limit their trading losses.…”

“…Boulatov and George (2013) show that informed traders compete more intensely as liquidity suppliers when they can hide their orders, causing an overall increase in market quality. In experimental market designs informed traders submit opaque orders in an effort to maintain their informational advantage for a longer period (see, e.g., Bloomfield, O'Hara, and Saar, 2014;Gozluklu, 2014). Esser and Mnch (2007) examine optimal liquidation strategies in the presence of reserve orders.…”

The Bright Side of Dark Markets: Experiments

“…In laboratory markets, hidden liquidity has been investigated in a single limit order book environment by providing traders with the ability to hide orders (Bloomfield, O'Hara, and Saar (2015), Gozluklu (2016)). Bloomfield, O'Hara, and Saar (2015) report that order strategies are greatly affected by allowing hidden liquidity, with traders substituting nondisplayed for displayed shares and changing the aggressiveness of their trading.…”

“…Additionally, most aggregate market outcomes such as liquidity and informational efficiency are not affected. Using iceberg markets, Gozluklu (2016) finds that, without information friction, market opacity enhances liquidity. Under informed trading, adverse selection drives market outcomes mainly around news announcements.…”