Hidden Limit Orders and Liquidity in Limit Order Markets

The dampening effect of iceberg orders on small traders’ welfare

“…Anand and Weaver (2004) show that by introducing iceberg orders on the Toronto Stock Exchange in 2002, the total depth of the LOB increased significantly. Consistent with this result, Moinas (2010) shows that larger market depth induces liquidity demanders to submit larger orders, which increases their expected utility, and liquidity suppliers can use iceberg orders to decrease the informational impact of their large orders. Consequently, both liquidity demanders and liquidity suppliers have higher welfare when trading in iceberg markets.…”

“…Our model differs from other theoretical models on LOBs and iceberg orders (see, for example, Moinas 2010;Boulatov and George 2013;Buti and Rindi 2013) in that those models are typically concerned with the traders' decisions over what type of order to submit and the optimal price, peak and/or order size. By contrast, we take the prices and quantities submitted as exogeneous parameters because we want to determine how a trade executed in a fully transparent market compares, in terms of welfare, with that same trade executed in a market with possible iceberg orders.…”

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

“…If this is the underlying reason, then opacity introduced through undisclosed orders could harm the informational e¢ ciency of …nancial markets. While the e¤ect on market quality is positive due to increased trading volume (Moinas, 2010), this view also highlights the potential role of undisclosed orders as a tool to obscure insider trading. Boulatov and George (2013) suggest that hidden liquidity attracts informed traders to liquidity provision, hence improving liquidity and informational e¢ ciency via intense competition.…”

“…De Winne and D'Hondt, (2007) and Frey and Sandas (2008) fail to …nd any impact of private information on hidden liquidity provision. Moinas (2010) proposes the …rst theoretical model with private information to analyze the e¤ect of undisclosed orders on market performance and trader welfare. She builds a discrete sequential model of trading with incomplete information and concludes that hidden liquidity is part of the informed (insider) agent's equilibrium camou ‡age strategy.…”

“…They predict that informed traders are more inclined to provide liquidity in opaque markets. Moinas (2010) and Boulatov and George (2013) suggest improved liquidity through reduced pre-trade transparency. Anand and Weaver (2004) show that informed traders use hidden liquidity to minimize price impacts if trading activity is high using data from the Toronto Stock Exchange.…”