Hidden Liquidity, Market Quality, and Order Submission Strategies

Abstract

Using a recent pilot program as an exogenous shock to hidden liquidity, we show that hidden liquidity has significant effects on various measures of market quality and order submission strategies after controlling for market volatility and other stock attributes. 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. Traders use more inside-the-quote limit orders, and algorithmic traders engage in more pinging activities and raise message traffic when there is more hidden liquidity.