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

Hidden orders add an important dimension to traders' strategies. This paper investigates why traders hide their orders and how other traders respond to the detection of hidden depth, using Euronext data. Our findings suggest that traders use hidden quantity to manage exposure risk and to mitigate adverse selection costs. Market members are less likely to hide their limit orders. The paper also produces evidence that traders detect hidden depth and adapt their order placement strategy accordingly. When hidden depth is discovered on the opposite side of the market, order aggressiveness increases. When hidden depth is discovered on the same side of the market, principal orders are less aggressive while client order aggressiveness increases