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. We also find that opacity appears to
increase the profits of informed traders but only when their private information is very
valuable.
Link to paper