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Undisclosed orders and optimal submission strategies in a limit order market

Authors
Journal
Journal of Financial Economics
0304-405X
Publisher
Elsevier
Volume
109
Issue
3
Identifiers
DOI: 10.1016/j.jfineco.2013.04.002
Keywords
  • Reserve Orders
  • Limit Order Book
  • Liquidity
  • Welfare

Abstract

Abstract Reserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This paper outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders and simultaneously set price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always benefit from reserve orders, whereas small traders benefit only when the tick size is large.

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