"Every Move You Make, Every Step You Take, I'll Be Watching You" - the Quest for Hidden Orders in the Interbank FX Spot Market
In the paper we seek to investigate different liquidity or information-oriented factors that exert an impact on the submission of iceberg (i.e., partially hidden) orders in the Reuters Dealing Spot 3000 Matching System, the major interbank order-driven market for EUR/PLN spot trading. With this empirical analysis, we present the first - to our knowledge - market microstructure study on the order exposure decisions in FX markets. Our results indicate that the decision whether to hide a part of the submitted order size is significantly influenced by order attributes, measures of the order book shape, and the prevailing market conditions. Thus, we evidence that FX dealers perform a constant monitoring of time-varying market conditions and constantly adjust their individual trading decisions with regard to the continuously changing market environment. The most significant factors explaining order exposure include the size of submitted order and the level of its aggressiveness, different measures of the instantaneous liquidity of the market, the time of a day, previously observed returns, volatility, and the types of orders previously observed. When having taken into account all of these explanatory factors that may be either observable or unobservable by other market participants, the prediction accuracy of the endogeneity-corrected probit model for the decision whether to submit an iceberg order is very high. (original abstract)
- Aitken M.J., Berkman H., Mak D. (2001), The use of undisclosed limit orders on the Australian Stock Exchange, Journal of Banking and Finance, 25, 1589-1603.
- Anand A., Weaver D.G. (2004), Can order exposure be mandated?, Journal of Financial Markets, 7, 405-426.
- Bauwens L., Hautsch N. (2006), Stochastic conditional intensity processes, Journal of Financial Econometrics, 4, 450-493.
- Bauwens L., Veredas D. (2004), The stochastic conditional duration model: a latent factor model for the analysis of financial durations, Journal of Econometrics, 199, 381-412.
- Bae K.-H., Jang H., Park K. (2003), Traders' choice between limit and market orders: evidence from NYSE stocks, Journal of Financial Markets, 6, 517-538.
- Beltran-Lopez H., Giot P., Grammig J. (2009), Commonalities in the order book, Financial Markets and Portfolio Management, 23, 209-242.
- Bessembinder H., Panayides M., Venkatamaran K. (2009), Hidden liquidity: an analysis of order exposure strategies in electronic stock markets, Journal of Financial Economics, 94, 361-383.
- Bień K. (2006), Model ACD - podstawowa specyfikacja i przykład zastosowania, Przegląd Statystyczny, 53(3), 90-108.
- Bień K. (2010), Przepływ zleceń a kurs walutowy - badanie mikrostruktury międzybankowego kasowego rynku złotego, Bank i Kredyt, 41(5), 5-40.
- Bień-Barkowska K. (2014), Capturing order book dynamics in the interbank EUR/PLN spot market, Emerging Markets Finance and Trade, forthcoming.
- Bowsher C.G. (2007), Modelling security markets in continuous time: intensity based, multivariate point process models, Journal of Econometrics, 141, 876-912.
- Brunnermeier M.K., Pedersen L.H. (2005), Predatory trading, The Journal of Finance, 60, 1825-1863.
- Buti S., Rindi B., Werner I.M. (2011), Diving into black pools, Working Paper, Fisher College of Business, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1630499.
- Buti S., Rindi B., Werner I.M. (2011), Dark pool trading strategies, Working Paper, Fisher College of Business, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571416.
- Chakrabarty B., Shaw K.W. (2008), Hidden liquidity: order exposure strategies around earnings announcements, Journal of Business Finance and Accounting, 35, 1220-1244.
- Copeland T.E., Galai D. (1983), Information effects on the bid-ask spreads in the over-the-counter market, Journal of Finance, 38, 1457-1469.
- De Winnie R., D'Hondt C. (2007), Hide-and-seek in the market: placing and detecting hidden orders, Review of Finance, 11, 663- 692.
- Doman M. (2010), Liquidity and market microstructure noise: evidence from the Pekao data, Dynamic Econometric Models, 10, 5-14.
- Doman M. (2011), Mikrostruktura giełd papierów wartościowych, UE Poznań, Poznań.
- Easley D., O'Hara M. (1987), Price, trade size and information in securities markets, Journal of Financial Economics, 19, 69-90.
- Easley D., O'Hara M. (1992), Time and the process of security price adjustment, Journal of Finance, 47, 577-607.
- Ellul A., Holden C., Jain P., Jennings R. (2007), Order dynamics: recent evidence from the NYSE, Journal of Empirical Finance, 14, 636-661.
- Esser A., Mönch B. (2007), The navigation of an iceberg: the optimal use of hidden orders, Finance Research Letters, 4, 68-81.
- Foucault T. (1999), Order flow composition and trading costs in a dynamic limit order market, Journal of Financial Markets, 2, 99-134.
- Foucault T., Kadan O., Kandel E. (2005), Limit order book as a market for liquidity, Review of Financial Studies, 18, 1171-1217.
- Goettler L.R., Parlour C., Rajan U. (2005), Equilibrium in a dynamic limit order market, Journal of Finance, 60, 2149-2192.
- Hall A., Hautsch N. (2006), Order aggressiveness and order book dynamics, Empirical Economics, 30, 973-1005.
- Hall A., Hautsch N. (2007), Modelling the buy and sell intensity in a limit order book, Journal of Financial Markets, 10, 249-286.
- Harris L. (1996), Does a large minimum price variation encourage order exposure?, unpublished manuscript.
- Harris L. (1997), Order exposure and parasitic traders, unpublished manuscript.
- Harris L. (2003), Trading and exchanges. Market microstructure for practitioners, Oxford University Press, New York.
- Hautsch N. (2004), Modelling irregularly spaced financial data, Springer, Berlin.
- Hautsch N., Huang R. (2012), On the dark side of the market: identifying and analyzing hidden order placements, CSF Working Paper Series, 2012/04.
- King M.R., Osler C.L., Rime D. (2013), The market microstructure approach to foreign exchange: looking back and looking forward, Journal of International Money and Finance, 38, 95-119.
- Large J. (2007), Measuring the resiliency of an electronic limit order book, Journal of Financial Markets, 10, 1-25.
- Lo I., Sapp S. (2008), The submission of limit orders or market orders: the role of timing and information in the Reuters D2000-2 system, Journal of International Money and Finance, 27, 1056-1073.
- Lo I., Sapp S. (2010), Order aggressiveness and quantity: How are they determined in a limit order market?, Journal of International Financial Markets, Institutions & Money, 20, 213-237.
- Lyons R.K. (2000), The microstructure approach to exchange rates, MIT Press, Cambridge.
- Monais S. (2010), Hidden limit orders and liquidity in limit order markets, Working Paper, 2012/3, Toulouse Business School, http://ideas.repec.org/p/tse/wpaper/22439.html.
- Nolte I., Voev V. (2011), Trading dynamics in the foreign exchange market: a latent factor panel intensity approach, Journal of Financial Econometrics, 9, 685-716.
- Parlour C. (1998), Price dynamics in limit order markets, Review of Financial Studies, 11, 789- 816.
- Patterson S. (2012), Dark pools. The rise of machine traders and the rigging of the U.S. stock market, Crown Business, New York.
- Ranaldo A. (2004), Order aggressiveness in limit order book markets, Journal of Financial Markets, 7, 53-74.
- Rosu I. (2009), A dynamic model for the limit order book, Review of Financial Studies, 22, 4601-4641.
- Silverman B.W. (1998), Density estimation for statistics and data analysis, Chapman & Hall, London.
- SEC, CFTC (2010), Findings regarding the market events of M ay 6, 2010 - Report of the staffs of the C FTC and S EC to the Joint Advisory Committee on Emerging Regulatory Issues, U.S. Securities and Exchange Commission, Commodity Futures Trading Commission, http:// www.sec.gov/news/studies/2010/marketevents-report.pdf.
- Verhoeven P., Ching S., Ng H. (2004), Determinants of the decision to submit market or limit orders on the ASX, Pacific-Basin Finance Journal, 12, 1-18.