Hidden Liquidity: Some New Light on Dark Trading

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Abstract
We use a laboratory market to investigate how the ability to hide orders affects traders’ strategies and market outcomes. We examine three market structures: Visible markets in which all orders must be displayed, Iceberg markets in which a minimum size must be displayed, and Hidden markets in which orders can be displayed, partially displayed, or completely non-displayed. We find that although order strategies are greatly affected by allowing hidden liquidity, most market outcomes are not. Our results on the robustness of informational efficiency and liquidity to opacity regimes have important regulatory implications for debates surrounding dark trading.