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Review of Finance Advance Access originally published online on June 4, 2007
Review of Finance 2007 11(4):663-692; doi:10.1093/rof/rfm0016
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Copyright © The Author 2007. Published by Oxford University Press on behalf of the European Finance Association.

Hide-and-Seek in the Market: Placing and Detecting Hidden Orders*

Rudy De Winne1 and Catherine D'hondt2

1 Louvain School of Management and FUCaM
2 EDHEC Business School

This paper investigates why traders hide their orders and how other traders respond to hidden depth. Using a logit model, we provide empirical findings suggesting that traders use hidden orders to manage both exposure risk and picking off risk. Using probit models, we show that hidden depth increases order aggressiveness. Our interpretation of this empirical evidence is threefold. First, hidden depth detection is possible and frequent. Second, when traders detecthidden volume at the best opposite uote, they strategically adjust their order submission to seize the opportunity for depth improvement. Third, traders' response when hidden depth is detected suggests either that they do not associate hidden orders with informed trading or that the risk of trading with an informed trader is widely offset by the opportunity for depth improvement.

JEL Classification: G14, G10

* We are grateful to Euronext for giving us access to the data necessary for this research. We wish to thank C. Bisiere, H. Degryse, C. Gresse, P. Hazart, C. Klein, M. Pagano, M. Petitjean, G. Wuyts, and two anonymous referees for helpful discussion and comments, as well as participants at the 2003 EFMA Conference in Helsinki, Workshop on Automated Auction Markets in Namur, 2004 AFFI International Conference in Cergy, 2005 SWFA Conference in Dallas, International Conference on New Financial Market Structures in Montreal, and the 2005 Conference of the Swiss Society for Financial Market Research in Zurich. Of course, all remaining errors and omissions are the full responsibility of the authors. Comments are welcome: rudy.dewinne{at}fucam.ac.be


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