Does Anonymity Matter in Electronic Limit Order Markets?
61 Pages Posted: 4 Dec 2003
There are 3 versions of this paper
Does Anonymity Matter in Electronic Limit Order Markets?
Does Anonymity Matter in Electronic Limit Order Markets?
Does Anonymity Matter in Electronic Limit Order Markets?
Date Written: October 2003
Abstract
We analyse the effect of concealing limit order traders' identities on market liquidity. We develop a model in which limit order traders have asymmetric information on the cost of limit order trading (which is determined by the exposure to informed trading). A thin limit order book signals to uninformed bidders that the profitability of limit orders is small. This deters uninformed bidders from improving upon the posted quotes. Informed bidders exploit this effect by bidding as if the cost of liquidity provision were large when indeed it is small. This bluffing strategy is less effective when traders cannot distinguish between informative and uninformative limit orders. Hence informed bidders act more competitively in the anonymous market. For this reason, concealing limit order traders' IDs affects market liquidity in our model. We test this prediction using a natural experiment. On April 23, 2001, the limit order book for stocks listed on Euronext Paris became anonymous. We find that following this change, the average quoted spreads declined significantly whereas the quoted depth decreased.
Keywords: Market microstructure, limit order trading, anonymity, transparency, liquidity
JEL Classification: G10, G14, G24
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Lifting the Veil: An Analysis of Pre-Trade Transparency at the NYSE
By Ekkehart Boehmer, Gideon Saar, ...
-
Lifting the Veil: An Analysis of Pre-Trade Transparency at the Nyse
By Ekkehart Boehmer, Gideon Saar, ...
-
Does Anonymity Matter in Electronic Limit Order Markets?
By Thierry Foucault, Sophie Moinas, ...
-
Island Goes Dark: Transparency, Fragmentation, Liquidity Externalities, and Multimarket Regulation
-
Reputation Effects in Trading on the New York Stock Exchange
By Andrew Ellul, Robert H. Battalio, ...
-
The Economic Value of a Trading Floor: Evidence from the American Stock Exchange
By Ashish Tiwari, Robert A. Schwartz, ...
-
Lack of Anonymity and the Inference from Order Flow
By Juhani T. Linnainmaa and Gideon Saar
-
The Impact of Limit Order Anonymity on Liquidity: Evidence from Paris, Tokyo and Korea
By Carole Comerton-forde, Alex Frino, ...
-
Market Architecture and Global Exchange Efficiency: One Design Need not Fit all Stock Sizes