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Essays On Hidden Liquidity In Limit Order Markets
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Book Synopsis Essays on Hidden Liquidity in Limit Order Markets by : John Ritter
Download or read book Essays on Hidden Liquidity in Limit Order Markets written by John Ritter and published by . This book was released on 2016 with total page 329 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This dissertation consists of three chapters that examine the use of hidden liquidity in limit order markets. Chapter 1 models a dynamic limit order market to study how the ability to hide a limit order affects market quality and traders' behavior. In the model, traders vary in the speed with which they can adjust their limit orders (Fast and Slow traders) and in the information they possess about the fundamental value of the asset (Informed and Uninformed traders). The model predicts that Fast traders are more likely to conceal their limit orders than Slow traders, since they can adjust their hidden orders quicker if they lose priority to displayed orders. Hidden orders in the limit order book make it more difficult for Uninformed traders to infer the fundamental value of the asset, which causes Informed traders to conceal their limit orders more than Uninformed traders. The model also predicts that there is not a significant difference in market quality between a transparent market that only allows displayed orders and an opaque market that allows traders the option to conceal their limit orders. Surprisingly, the profits of Informed traders are lower in an opaque market, because Uninformed traders can better infer the fundamental value of the asset due to Informed traders increasing the aggressiveness of their displayed limit orders. Chapter 2 examines how the speed of market participants affects the decision to conceal a limit order. In terms of the order initiator, I find that traders with a speed advantage, high-frequency traders (HFTs), are more likely to hide an order in the limit order book, but slower traders, non-high frequency traders (NHFTs), are more likely to hide an order when supplying liquidity in a trade. This difference occurs because NHFTs are more likely to conceal their aggressively priced limit orders, which reduces their adverse selection costs. Hiding a limit order does not reduce the adverse selection faced by HFTs, who are more likely to conceal their less aggressively priced limit orders. In terms of other market participants, I find that the limit orders of both HFTs and NHFTs are less likely to be concealed as the proportion of trading volume in which HFTs participate increases. Overall, these findings suggest that the speed of both the order initiator and other market participants affect a trader's decision to conceal their limit order. Chapter 3 investigates if informed liquidity suppliers display or hide their limit orders. I find that imbalances in hidden liquidity in the limit order book predict returns at both the intraday and daily levels, while imbalances in displayed liquidity do not. This relationship remains robust after controlling for liquidity, order flow, and past returns. I examine hidden imbalances around earnings announcements and find that long-short portfolios based on the average hidden imbalance during the two days prior to the earnings announcement earn the greatest returns for announcements with the largest earnings surprise. I also examine hidden liquidity supplied by highfrequency traders (HFTs) and non-high frequency traders (NHFTs) and find that imbalances in the hidden liquidity supplied by NHFTs predict returns at the intraday level, while imbalances in the hidden liquidity supplied by HFTs do not. These results are consistent with the hypothesis that informed NHFTs, who possess longlived information compared to HFTs, supply liquidity using hidden orders to prevent information leakage."--Pages iv-v.
Book Synopsis Hidden Liquidity by : Hendrik Bessembinder
Download or read book Hidden Liquidity written by Hendrik Bessembinder and published by . This book was released on 2009 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many stock exchanges choose to reduce market transparency by allowing traders to hide some or all of their order size. We study costs and benefits of hidden order usage for a sample of Euronext-Paris stocks, where hidden orders represent 44% of sample order volume. All else equal, hidden orders are associated with smaller opportunity costs and lower implementation shortfall costs. However, hidden orders are less likely to execute completely and exhibit longer times to execution. The presence and magnitude of hidden orders can be predicted to a significant but imperfect degree based on observable order attributes, firm characteristics and market conditions. We find that the option to hide order size is used differently by traders who submit passive versus aggressively priced orders. Specifically, aggressively priced orders tend to be exposed, to draw out potential counterparties and allow quick execution, while larger and less aggressively priced orders tend to be hidden, to reduce the option value of standing limit orders. Overall, the results indicate that the option to hide order size is valuable, in particular to patient traders without superior information on future security price movements.
Book Synopsis Essays in Market Microstructure by : Michael Brolley
Download or read book Essays in Market Microstructure written by Michael Brolley and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Three Essays on Hidden Liquidity in Financial Markets by : Gökhan Cebiroglu
Download or read book Three Essays on Hidden Liquidity in Financial Markets written by Gökhan Cebiroglu and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Limit Order Book Dynamics and Asset Liquidity by : Georg Pristas
Download or read book Limit Order Book Dynamics and Asset Liquidity written by Georg Pristas and published by Cuvillier Verlag. This book was released on 2008 with total page 163 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Liquidity, Markets and Trading in Action by : Deniz Ozenbas
Download or read book Liquidity, Markets and Trading in Action written by Deniz Ozenbas and published by Springer Nature. This book was released on 2022 with total page 111 pages. Available in PDF, EPUB and Kindle. Book excerpt: This open access book addresses four standard business school subjects: microeconomics, macroeconomics, finance and information systems as they relate to trading, liquidity, and market structure. It provides a detailed examination of the impact of trading costs and other impediments of trading that the authors call rictions It also presents an interactive simulation model of equity market trading, TraderEx, that enables students to implement trading decisions in different market scenarios and structures. Addressing these topics shines a bright light on how a real-world financial market operates, and the simulation provides students with an experiential learning opportunity that is informative and fun. Each of the chapters is designed so that it can be used as a stand-alone module in an existing economics, finance, or information science course. Instructor resources such as discussion questions, Powerpoint slides and TraderEx exercises are available online.
Book Synopsis High Frequency Trading, Hidden Orders and Market Quality in Equities by : Cheng Gao
Download or read book High Frequency Trading, Hidden Orders and Market Quality in Equities written by Cheng Gao and published by . This book was released on 2015 with total page 124 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first essay studies the roles of trading speed and hidden orders in limit order markets. We develop a model where liquidity suppliers differ in speed of revising their limit orders and have an option of hiding their orders. The model predicts that fast liquidity suppliers bear lower adverse selection risk and therefore submit orders with narrower bid-ask spreads. Slow liquidity suppliers may overcome their speed disadvantage by using hidden orders. We also provide empirical results that support the model. We find that non-high frequency trading firms account for 70% of liquidity provision in hidden executions, and hidden orders have significantly narrower spreads and lower adverse selection risk than visible orders. Our theoretical model and empirical findings suggest that high frequency technology and hidden orders are substitutes in reducing adverse selection risk. The second essay investigates market quality breakdowns in equity markets. A breakdown occurs when an order book thins to the point where extreme price movements are observed. These are frequently reversed as the market learns that nothing fundamental has occurred. The daily average breakdown frequency from 1993-2011 is 0.64%, with averages in 2010-11 below this amount. Controlling for microstructure effects, breakdowns have fallen significantly since Reg NMS. Spikes in market correlation and high frequency trading (HFT) surges make breakdowns more likely. Exchange traded funds (ETFs) break down more often than non-ETFs. Both ETFs and HFT Granger cause market correlation. Breakdowns are predictable for up to two days. The third essay analyzes HFT activity in equities during U.S. Treasury permanent open market (POMO) purchases by the Federal Reserve. We construct a model to study HFT quote and trade behavior when private information is released. We estimate that HFT firms reduce their inside quote participation by up to 8% during POMO auctions. HFT firms trade more aggressively, and they supply less passive liquidity to non-HFT firms. Market impact also rises during Treasury POMO. Aggressive HFT trading becomes more consistently profitable, and HFT firms earn a higher return per share. We also estimate that HFT firms earn profits of over $105 million during U.S. Treasury POMO events.
Book Synopsis Limit Order Book as a Market for Liquidity by : Thierry Foucault
Download or read book Limit Order Book as a Market for Liquidity written by Thierry Foucault and published by . This book was released on 2001 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Optimal Order Display in Limit Order Markets with Liquidity Competition by : Gökhan Cebiroglu
Download or read book Optimal Order Display in Limit Order Markets with Liquidity Competition written by Gökhan Cebiroglu and published by . This book was released on 2017 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: Order display is associated with benefits and costs. Benefits arise from increased execution-priority, while costs are due to adverse market impact. We analyze a structural model of optimal order placement that captures trade-off between costs and benefits of order display. For a benchmark model of pure liquidity competition, we give closed-form solution for optimal display sizes. We show that competition in liquidity supply incentivizes the use of hidden orders to prevent losses due to over-bidding. Thus, due to aggressive liquidity competition, our model predicts that the use of hidden orders is more prevalent in liquid stocks. Our theoretical considerations ares supported by an empirical analysis using high-frequency order-message data from NASDAQ. We find that there are no benefits in hiding orders in il-liquid stocks, whereas the performance gains can be significant in liquid stocks.
Book Synopsis Information Flow in a Fragmented Dealer Market by : Laura A. Tuttle
Download or read book Information Flow in a Fragmented Dealer Market written by Laura A. Tuttle and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: The 1990's were a period of rapid change in the trading of Nasdaq stocks. Advances in network technology improved the market's ability to trade efficiently and disseminate real-time information. Concurrently, regulatory changes mandated inclusion of alternate trading venues in the quote montage, and restricted the manner in which customer limit orders are handled by market makers. This dissertation explores the price formation process in the Nasdaq market, examining how fragmentation and imperfect transparency affects price formation. The first essay, "Price Discovery in Nasdaq Issues", investigates price leadership relationships between Nasdaq market makers and Electronic Communications Networks (ECNs). Using the Hasbrouck information share and Gonzalo-Granger common factor methodologies, I show that ECNs provide more than half of the price discovery for approximately one out of three Nasdaq 100 stocks, although ECNs trades account for less than 33% of any Nasdaq 100 issue's trading activity. The second essay, "Hidden Orders, Trading Costs and Information", explores non-displayed (reserve) depth in Nasdaq market-maker quotes in SuperSOES. While the presence of hidden depth at the inside has no effect on effective half-spreads, the information content of a trade (as measured by the midquote adjustment in the 30 minutes post-trade) is lower when reserve size is quoted, suggesting reserve size signals short-term price movements. Displayed depth does not predict daily returns, but the non-displayed orders of investment banks and wirehouses are indicative of daily price changes. In the final essay, "News or Noise: Is the Price Impact of Island Trades Persistent?", I examine the trades on the Island ECN to discover whether their information impact is transient or permanent. I measure price impact at a number of horizons, allowing for the possibility of price reversals from liquidity motivated trades. Using simple regressions, I show Island trades are more informative than other trades only at short time horizons post-trade; at longer horizons, the price impact of an Island trade is not significantly different from trades in other venues. Island trades can be shown to be more informative at longer horizons only when the experimental design controls for the endogeneity of the trading venue decision.
Book Synopsis Hidden Liquidity by : Bidisha Chakrabarty
Download or read book Hidden Liquidity written by Bidisha Chakrabarty and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Electronic limit order books are prevalent in financial markets. Most allow quot;hidden orders,quot; in which the order's information is neither revealed to the market nor reflected in the National Best Bid and Offer quotes. Hidden orders comprise a large portion of the trading activity in many stocks. While they enable traders to conceal information, hidden orders lose time priority to displayed orders, and thus face increased risk of non-execution. We examine hidden order activity around earnings announcements, a time when demand for the opacity of hidden orders is likely high, due to heightened private information acquisition, but demand for immediate trade execution is also likely high due to increased trading activity. We find that hidden order volume, the number of hidden orders executed, hidden order trade size, and the full size of hidden orders executed all increase around earnings announcements. This suggests hidden orders provide significant liquidity at a time when quoted liquidity typically falls. We also show that changes in hidden order activity at earnings announcements are related to cross-sectional variation in the firm's pre-announcement information environment, the information conveyed by the earnings announcement, and changes in quoted liquidity.
Book Synopsis The Impact of Hidden Liquidity in Limit Order Books by : Gunther Wuyts
Download or read book The Impact of Hidden Liquidity in Limit Order Books written by Gunther Wuyts and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Impact of Hidden Liquidity in Limit Order Books by : Gunther Wuyts
Download or read book The Impact of Hidden Liquidity in Limit Order Books written by Gunther Wuyts and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis The Microstructure of Financial Markets by : Frank de Jong
Download or read book The Microstructure of Financial Markets written by Frank de Jong and published by Cambridge University Press. This book was released on 2009-05-14 with total page 209 pages. Available in PDF, EPUB and Kindle. Book excerpt: The analysis of the microstructure of financial markets has been one of the most important areas of research in finance and has allowed scholars and practitioners alike to have a much more sophisticated understanding of the dynamics of price formation in financial markets. Frank de Jong and Barbara Rindi provide an integrated graduate level textbook treatment of the theory and empirics of the subject, starting with a detailed description of the trading systems on stock exchanges and other markets and then turning to economic theory and asset pricing models. Special attention is paid to models explaining transaction costs, with a treatment of the measurement of these costs and the implications for the return on investment. The final chapters review recent developments in the academic literature. End-of-chapter exercises and downloadable data from the book's companion website provide opportunities to revise and apply models developed in the text.
Book Synopsis Market Liquidity, Stock Characteristics and Order Cancellations by : Konstantin Tyurin
Download or read book Market Liquidity, Stock Characteristics and Order Cancellations written by Konstantin Tyurin and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We document stylized facts about very short-lived - fleeting - orders submitted to a limit order trading platform, and study the dynamics of fleeting order activity. Principal component analysis for the probabilities of limit order cancellation shows that most of the cross-sectional variation in limit order cancellation probabilities can be explained by the inverse of the relative tick size of the stock, which can be interpreted as the limit order book granularity for this stock. We model the non-marketable limit order flow as a mixture of two order types, one for very short duration orders and the other for longer duration order. By allowing the mixing probability to depend on time of the day, stock characteristics, and market conditions, we find that fleeting orders are more likely to be observed for aggressive quotes, and in market conditions characterized by higher volatility, wider bid-ask spreads, and higher volumes of hidden transactions inside the spread.
Book Synopsis Hidden Liquidity by : Robert J. Bloomfield
Download or read book Hidden Liquidity written by Robert J. Bloomfield and published by . This book was released on 2014 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: We use a laboratory market to 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 non-displayed 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.
Book Synopsis The Empirical Analysis of Liquidity by : Craig Holden
Download or read book The Empirical Analysis of Liquidity written by Craig Holden and published by Now Publishers. This book was released on 2014-11-28 with total page 90 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide a synthesis of the empirical evidence on market liquidity. The liquidity measurement literature has established standard measures of liquidity that apply to broad categories of market microstructure data. Specialized measures of liquidity have been developed to deal with data limitations in specific markets, to provide proxies from daily data, and to assess institutional trading programs. The general liquidity literature has established local cross-sectional patterns, global cross-sectional patterns, and time-series patterns.
