Undisclosed orders and optimal submission strategies in a limit order market |
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Authors: | Sabrina Buti Barbara Rindi |
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Institution: | 1. University of Toronto, Rotman School of Management, Toronto, ON M5S 3E6, Canada;2. Bocconi University, Department of Finance and IGIER, Milan 20136, Italy |
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Abstract: | Reserve orders enable traders to hide a portion of their orders and now appear in most electronic limit order markets. This paper outlines a theory to determine an optimal submission strategy in a limit order book, in which traders choose among limit, market, and reserve orders and simultaneously set price, quantity, and exposure. We show that reserve orders help traders compete for the provision of liquidity and reduce the friction generated by exposure costs. Therefore, total gains from trade increase. Large traders always benefit from reserve orders, whereas small traders benefit only when the tick size is large. |
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Keywords: | G14 |
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