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Journal of Financial and Quantitative Analysis Vol. 46 No. 4 2011

Why Do Traders Choose to Trade Anonymously?

Carole Comerton-Forde; Tālis J. Putniņš1,2; Kar Mei Tang3

1 University of Technology Sydney · 2 Stockholm School of Economics in Riga · 3 The University of Sydney

open access

Abstract

This paper examines the use, determinants, and impact of anonymous orders in a market where disclosure of broker identity in the trading screen is voluntary. We find that most trading occurs nonanonymously, contrary to prior literature that suggests liquidity gravitates to anonymous markets. By strategically using anonymity when it is beneficial, traders reduce their execution costs. Traders select anonymity based on various factors including order source, order size and aggressiveness, time of day, liquidity, and expected execution costs. Finally, we report how anonymous orders affect market quality and discuss implications for market design.

DOI
10.1017/s0022109011000214
Volume
46
Issue
4
Pages
1025-1049
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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