Hidden Liquidity: Some New Light on Dark Trading

Hidden Liquidity: Some New Light on Dark Trading

  • ROBERT BLOOMFIELD
  • MAUREEN O'HARA
  • GIDEON SAAR

Article first published online: 3rd September 2015 DOI: 10.1111/jofi.12301

Abstract


Using a laboratory market, we investigate how the ability to hide orders affects traders’ strategies and market outcomes in a limit order book environment. We find that order strategies are greatly affected by allowing hidden liquidity, with traders substituting nondisplayed for displayed shares and changing the aggressiveness of their trading. As traders adapt their behavior to the different opacity regimes, however, most aggregate market outcomes (such as liquidity and informational efficiency) are not affected as much. We also find that opacity appears to increase the profits of informed traders but only when their private information is very valuable.

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