Optimal Order Display in Limit Order Markets with Liquidity Competition

31 Pages Posted: 16 Jan 2015

See all articles by Gökhan Cebiroglu

Gökhan Cebiroglu

University of Vienna, Faculty of Business and Economics

Ulrich Horst

Humboldt University of Berlin

Date Written: January 14, 2015

Abstract

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.

Keywords: Hidden Liquidity, Liquidity Competition, Limit Order Book, Market Impact, Order Flow Dynamics, High-Frequency Trading, Order-Imbalance

JEL Classification: C51, C60, D01, D4, G1

Suggested Citation

Cebiroglu, Gökhan and Horst, Ulrich, Optimal Order Display in Limit Order Markets with Liquidity Competition (January 14, 2015). Available at SSRN: https://ssrn.com/abstract=2549739 or http://dx.doi.org/10.2139/ssrn.2549739

Gökhan Cebiroglu (Contact Author)

University of Vienna, Faculty of Business and Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria
+43-1-4277-38682 (Phone)

Ulrich Horst

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, AK Berlin 10099
Germany

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