Why Do Traders Choose to Trade Anonymously?(PDF) Why Do Traders Choose to Trade Anonymously?. Available from:
https://www.researchgate.net/publication/227360152_Why_Do_Traders_Choose_to_Trade_Anonymously [accessed Nov 01 2018].
Excerpt:
We find that, despite having the option of anonymity, most traders choose to trade non-
anonymously. This raises the question of whether fully anonymous markets are optimal in
meeting the needs of their users. The majority of anonymous orders are in the form of passive
limit orders placed by client and proprietary accounts. However, specialists account for a large
proportion of aggressive anonymous market orders. It is possible that specialists prefer to trade
anonymously when they possess superior knowledge of pending large trades. One source of such
information is from orders being “shopped” in the upstairs market (Griffiths et al. (2000), Davies
(2003)). In such instances, anonymity is useful for concealing information, thus reducing the
immediate price impact of their trades.
Our second contribution is in modeling the determinants of the decision to trade
anonymously, and examining if these decisions result in lower execution costs. This is the first
study to examine these issues on a common trading system within a common time period. We
find that by strategically selecting anonymity when it is beneficial, traders reduce their execution
costs. This is likely to be because informed traders use anonymity to reduce opportunities for
trading-ahead and piggybacking.1 At the same time, patient uninformed traders can use
anonymity to make it more difficult for other traders to identify their individual trading patterns