Hide-and-Seek in the Market : Placing and Detecting Hidden Orders
This paper investigates why traders hide their orders and how other traders respond to the detection of hidden depth.
Rudy De Winne
School of Management and FUCaM
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 the detection of hidden depth increases order aggressiveness.
Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detect hidden volume at the best opposite quote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is discovered 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.
Hide-and-Seek in the Market : Placing and Detecting Hidden Orders...
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