Les Cahiers de Recherche - HEC Paris
Does anonymity matter in electronic limit order markets ?
(), MOINAS Sophie and THEISSEN Erik
Abstract: We analyze the effect of concealing limit order traders’
identities on market liquidity. We develop a model in which limit order
traders have asymmetric information on the cost of limit order trading
(which is determined by the exposure to informed trading). A thin limit
order book signals to uninformed bidders that the profitability of limit
orders is small. This deters uninformed bidders from improving upon the
posted quotes. Informed bidders exploit this effect by bidding as if the
cost of liquidity provision were large when indeed it is small. This
bluffing strategy is less effective when traders cannot distinguish between
informative and uninformative limit orders. Hence informed bidders act more
competitively in the anonymous market. For this reason, concealing limit
order traders’ IDS affects market liquidity in our model. We test this
prediction using a natural experiment. On April 23, 2001, the limit order
book for stocks listed on Euronext Paris became anonymous. We find that
following this change, the average quoted spreads declined significantly
whereas the quoted depth decreased.
Keywords: Market Microstructure; Limit Order Trading; Anonymity; Transparency; Liquidity; (follow links to similar papers)
JEL-Codes: G10; G14; G24; (follow links to similar papers)
57 pages, July 1, 2003
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