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Hidden liquidity, market quality, and order submission strategies

Author

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  • Lee, Albert J.
  • Chung, Kee H.

Abstract

Using exogenous changes in hidden liquidity from the Tick Size Pilot Program, we show that hidden liquidity on lit venues has significant effects on various measures of market quality and order submission strategies after controlling for the impact of dark pools and stock attributes. We find that spreads, depths, trading volume, and trade size increase with hidden liquidity. The extent of informed trading and the price impact of a trade also increase with hidden liquidity on lit venues. Traders use more inside-the-quote limit orders, while algorithmic traders engage in more pinging activities and raise message traffic with more hidden liquidity.

Suggested Citation

  • Lee, Albert J. & Chung, Kee H., 2022. "Hidden liquidity, market quality, and order submission strategies," Journal of Financial Markets, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finmar:v:61:y:2022:i:c:s1386418122000313
    DOI: 10.1016/j.finmar.2022.100739
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    More about this item

    Keywords

    Hidden liquidity; Tick size pilot program; Undisclosed orders; Dark pools; Order aggressiveness; Algorithmic trading; Pricing efficiency;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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