آیا مواجهه با سفارش می تواند اجباری باشد؟

In this paper, we examine whether the hidden portion of limit orders represents depth that would be revealed if traders were not allowed to hide it, and the associated market quality implications. Specifically, we examine the decisions by the Toronto Stock Exchange to first abolish the use of hidden limit orders in 1996, and then reintroduce them in 2002. We find that quoted depth does not change following either decision, suggesting that the hidden portion of orders represents depth that would otherwise not be exposed. Using confidential order data for the period following the reintroduction of hidden limit orders, we find that total inside depth increases. For both events, volume does not change and the usage of the limit order book increases if hidden limit orders are allowed. This suggests that if traders are required to expose their orders they will not exit the market, but instead will switch to using market orders. We also find evidence to suggest that informed traders use hidden limit orders to minimize price impact if the probability of non-execution is small.

Transparency in the trading process has recently emerged as an area of sharp disagreement among regulators, exchanges, market participants and academics. The Securities and Exchange Commission is clear on its stand that the more transparent a market, the better it is for the investors.1 In contrast, recent studies suggest that while some forms of transparency improve market quality, others may actually result in a decline in market quality. These academic studies have also shown differing trader behavior for different types and levels of transparency. In this paper, we contribute to the pre-trade transparency literature by examining the impact of mandated order exposure on market quality and trader behavior. Specifically, we examine the Toronto Stock Exchange's decisions first to abolish the use of hidden limit orders for the stocks traded on its electronic Computer Aided Trading System (CATS) on March 18, 1996, and then to reintroduce them six years later, on April 12, 2002.2 These exogenous shocks with opposite predictions over two different time periods provide us with a unique opportunity to study the market quality implications of hidden limit orders. The availability of confidential order data for the 2002 sample also allows us to observe hidden liquidity and thus allows us to directly test hypotheses regarding the usage and placement of hidden limit orders. The exchange's decision in 1996 to abolish hidden limit orders may have been an attempt to improve quoted depth in the belief that higher displayed liquidity would attract additional order flow from market order traders. If such an influx of additional order flow were to occur, then the probability of execution for limit order traders would increase as well, thus making the market more attractive to limit order traders. However, market participants determine the success of any regulation. Therefore, we focus our study on the motivations for the use of hidden limit orders. Limit order traders hide quantity in the limit order book to limit the option value of their order, to reduce the risk of being front run, to minimize losses due to trading with informed investors, or, if they are informed, to hide their information and minimize price impact. Once order size can no longer be hidden, traders are faced with three choices: (1) display the hidden portion of their order, (2) exit the market, or (3) manage their orders actively. Each of these choices would have significant, and different, implications for market quality. We find that spreads, quoted depth, total liquidity (measured by Kyle's lambda) and volume are not affected by the abolition of hidden limit orders. This leads us to conclude that limit order traders did not simply reveal the hidden portion of their orders, but instead actively managed their orders. This is corroborated by a decrease in the number of quote updates indicating fewer limit orders being placed on the book. We find no evidence that market quality either improved or deteriorated as a result of the exchange's decision to disallow the use of hidden orders. The results of the period surrounding re-introduction of hidden limit orders are consistent with those around their abolition. We find that once again spreads, execution costs and visible depth remain unchanged. The availability of order data allows us to directly observe hidden depth in this period. We find that total depth at the inside, which includes displayed as well as undisclosed depth, shows a statistically significant increase after the re-introduction of hidden limit orders. Further, consistent with the increased use of the limit order book, we find that quote updates increase significantly once the exchange allows traders to hide liquidity in the book. We find evidence to suggest that traders hide part of their limit orders to manage their exposure. We also find that informed traders are more likely to use hidden limit orders to reduce price impact if they can minimize the risk of non-execution. In particular, we find that the greatest usage of hidden limit orders occurs in the most active stocks where the chance of non-execution is smallest. Additionally we find that order placement aggressiveness is directly related to a stock's activity level. Since informed traders are generally the most impatient, we view this as further evidence that informed traders seek to hide size so as to reduce price impact, while balancing the cost of non-execution. This paper should be of interest to regulators as well as markets who seek rules to improve market quality.3 It should also be of interest to traders and academics since it sheds light on the behavior of market participants. In the next section we provide a review of related research. Section 2 develops our hypotheses, Section 3 describes the data and gives a brief description of trading on TSX, 4 and 5 discuss the results and Section 6 concludes.

Previous research has shown that transparency has significant impact on market quality and the behavior of traders. This paper contributes to that literature by examining one type of pre-trade transparency—the ability to hide a portion of an order. We analyze the issue from the perspectives of market quality and trader behavior. As Harris (1996) points out limit order traders are concerned with being front-run, trading with informed traders and limiting the option value of their orders. Hiding size in the limit order book is a mechanism to manage these concerns. Faced with not being allowed to hide size, traders face the choice of exiting the market or using some other trading strategy. Our evidence points towards limit order traders switching from limit orders to market orders to manage the hidden part of their orders. In support of this conclusion we find that quoted spreads and quoted depths do not change in the periods surrounding the TSX’s decision first to abolish them and then to reintroduce hidden limit orders. However, the number of quote updates is larger if traders are allowed to hide a portion of their orders, suggesting that more frequent usage of the limit order book accompanies the ability to hide size. Evidence on total liquidity in the market indicates that markets remained as liquid as they were prior to the rule change. Effective spreads do not change, trading volumes do not change significantly, and liquidity as measured by Kyle’s lambda does not change. This suggests that users of hidden limit orders will switch to market orders if they cannot hide size. Examining confidential order data following the reintroduction of hidden limit orders reveals that total depth (quoted plus hidden) increases significantly. We find support for our hypothesis that traders who actively monitor the market use hidden limit orders less often than other traders. We also find that while traders appear to use hidden size to reduce the option value of limit orders stocks of all activity levels, informed traders are more likely to use hidden limit orders if the risk of nonexecution is small. In particular, while stocks in all activity levels exhibit an increase in hidden limit order usage, actively traded stocks (smallest probability of nonexecution) experience the largest increase as well as the most aggressive order placement. This paper therefore suggests that order exposure cannot be mandated and that attempts to mandate exposure will cause traders to seek other methods to trade, instead of displaying liquidity and increasing quoted depth. Thus, markets and regulators seeking to increase liquidity would be best served by not attempting to mandate order exposure.