Hidden liquidity, market quality, and order submission strategies

Albert J. Lee; Kee H. Chung

doi:10.1016/j.finmar.2022.100739

Hidden liquidity, market quality, and order submission strategies

Albert J. Lee
, Kee H. Chung

Finance

Truman State University

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

Abstract

Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.

Original language	English
Article number	100739
Journal	Journal of Financial Markets
Volume	61
DOIs	https://doi.org/10.1016/j.finmar.2022.100739
State	Published - Nov 2022

Keywords

Algorithmic trading
Dark pools
Hidden liquidity
Order aggressiveness
Pricing efficiency
Tick size pilot program
Undisclosed orders

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10.1016/j.finmar.2022.100739

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title = "Hidden liquidity, market quality, and order submission strategies",

abstract = "Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.",

keywords = "Algorithmic trading, Dark pools, Hidden liquidity, Order aggressiveness, Pricing efficiency, Tick size pilot program, Undisclosed orders",

author = "Lee, \{Albert J.\} and Chung, \{Kee H.\}",

note = "Publisher Copyright: {\textcopyright} 2022 Elsevier B.V.",

year = "2022",

month = nov,

doi = "10.1016/j.finmar.2022.100739",

language = "English",

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T1 - Hidden liquidity, market quality, and order submission strategies

AU - Lee, Albert J.

AU - Chung, Kee H.

PY - 2022/11

Y1 - 2022/11

N2 - Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.

AB - Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.

KW - Algorithmic trading

KW - Dark pools

KW - Hidden liquidity

KW - Order aggressiveness

KW - Pricing efficiency

KW - Tick size pilot program

KW - Undisclosed orders

UR - https://www.scopus.com/pages/publications/85131236578

U2 - 10.1016/j.finmar.2022.100739

DO - 10.1016/j.finmar.2022.100739

M3 - Article

AN - SCOPUS:85131236578

SN - 1386-4181

VL - 61

JO - Journal of Financial Markets

JF - Journal of Financial Markets

M1 - 100739

ER -

Hidden liquidity, market quality, and order submission strategies

Abstract

Keywords

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