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Trading anonymity and order anticipation

Author

Listed:
  • Friederich, Sylvain
  • Payne, Richard

Abstract

Does it matter to market quality if broker identities are revealed after a trade and only to the two traders involved? We find that implementing full anonymity dramatically improves liquidity and reduces trader execution costs. To explain this, we compare theories based on asymmetric information to an order anticipation mechanism, where identity signals trader size, allowing strategic agents to predict the future order flow of large traders. Evidence supports the anticipation hypothesis: liquidity improves most in stocks where trading is heavily concentrated among a few brokers and in stocks susceptible to temporary price pressure. Also, only traders having large market shares benefit from anonymity.

Suggested Citation

  • Friederich, Sylvain & Payne, Richard, 2014. "Trading anonymity and order anticipation," Journal of Financial Markets, Elsevier, vol. 21(C), pages 1-24.
    • Handle: RePEc:eee:finmar:v:21:y:2014:i:c:p:1-24
    DOI: 10.1016/j.finmar.2014.07.002
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    References listed on IDEAS

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    5. Pham, Manh Cuong & Anderson, Heather Margot & Duong, Huu Nhan & Lajbcygier, Paul, 2020. "The effects of trade size and market depth on immediate price impact in a limit order book market," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Trading anonymity; Limit order trading; Trading costs; Institutional investors; London Stock Exchange;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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