Post by Sapphire Capital on Aug 20, 2008 2:27:49 GMT 4
Hide-and-Seek in the Market: Placing and Detecting Hidden Orders
Rudy De Winne
FUCAM
Catherine D'Hondt
EDHEC Business School
Review of Finance, Vol. 11, Issue 4, pp. 663-692, 2007
Abstract:
This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, we provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, we show that hidden depth increases order aggressiveness. Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detecthidden volume at the best opposite uote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1159300
Rudy De Winne
FUCAM
Catherine D'Hondt
EDHEC Business School
Review of Finance, Vol. 11, Issue 4, pp. 663-692, 2007
Abstract:
This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, we provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, we show that hidden depth increases order aggressiveness. Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detecthidden volume at the best opposite uote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1159300