Order display is associated with benefits and costs. Benefits arise from increased execution-priority, while costs are due to adverse market impact. We analyze a structural model of optimal order placement that captures trade-off between costs and benefits of order display. For a benchmark model of pure liquidity competition we give closed-form solution for optimal display sizes. We show that liquidity competition incentivizes the use of hidden orders to prevent losses due to over- bidding. On the other hand, we predict that the use of hidden orders is more prevalent in stocks with low depth. Our theoretical considerations are accompanied by an empirical analysis using high-frequency order-message data from NASDAQ. The talk is based on joint work with Gokhan Cebiroglu.
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