Abstract
This paper investigates the use of undisclosed limit orders on the Australian Stock Exchange (ASX). Our findings suggest that undisclosed limit orders are used to reduce the option value of limit orders. We find no evidence that undisclosed limit orders are more frequently used by informed traders than disclosed limit orders. The effects of recent changes in undisclosed order regulation are also examined. We find that the enhancement in pre-trade transparency, through tightening the undisclosed order regulation in October 1994, resulted in a significant decline in trading volume. The impact of the second regulation change in October 1996, which further tightened undisclosed order regulation, resulted in a less significant trading volume reduction.
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