Order Exposure in High-Frequency Markets

Abstract We examine hidden orders usage by algorithmic traders (ATs) and nonATs. ATs extensively use hidden orders but of smaller size than nonATs, who are the primary contributors to hidden volume. ATs’ relative share of hidden volume decreases with volatility, adverse selection costs, and the relative tick-size. Proprietary ATs (HFTs), who differ from agency ATs (AATs) in their information sets and potential gains from trade, hide orders to reduce competition for liquidity provision, whereas AATs use hidden orders to conceal information in their more informed orders and manage picking-off risk. Finally, superior technology provides limited benefit for hidden order execution.