TY - JOUR
T1 - Transparency in fragmented markets
T2 - Experimental evidence
AU - Hendershott, Terrence
AU - Wee, Marvin
AU - Wen, Yuanji
N1 - Publisher Copyright:
© 2022
PY - 2022/6
Y1 - 2022/6
N2 - We experimentally examine pre-trade transparency in fragmented limit order markets. Allowing traders to hide their orders encourages limit order usage. This improves measures of liquidity by increasing depth and narrowing spreads. However, because some of this depth is not displayed, market fragmentation may limit traders’ ability to capitalize on the improved liquidity. This happens when traders execute against orders at worse prices than orders in another market, often referred to as “trade-throughs.” In our laboratory setting, increased trade-throughs in a dark market impose costs of similar magnitude to the benefits of increases in depth leaving effective liquidity unchanged.
AB - We experimentally examine pre-trade transparency in fragmented limit order markets. Allowing traders to hide their orders encourages limit order usage. This improves measures of liquidity by increasing depth and narrowing spreads. However, because some of this depth is not displayed, market fragmentation may limit traders’ ability to capitalize on the improved liquidity. This happens when traders execute against orders at worse prices than orders in another market, often referred to as “trade-throughs.” In our laboratory setting, increased trade-throughs in a dark market impose costs of similar magnitude to the benefits of increases in depth leaving effective liquidity unchanged.
KW - Dark pool trading
KW - Hidden orders
KW - Iceberg orders
KW - Laboratory test
KW - Limit order book market
UR - http://www.scopus.com/inward/record.url?scp=85128265993&partnerID=8YFLogxK
U2 - 10.1016/j.finmar.2022.100732
DO - 10.1016/j.finmar.2022.100732
M3 - Article
SN - 1386-4181
VL - 59
JO - Journal of Financial Markets
JF - Journal of Financial Markets
M1 - 100732
ER -