Dual Traders in Fully Anonymous Stock Markets, Iceberg Orders, and Liqudity Provision

Abstract

The permission of dual trading in stock markets is highly controversial in academic as well as the practitioners' discussions, due to the thread of front-running/piggy-backing. This article contributes to that discussion by analyzing an equity market (namely Xetra in Germany) that has unique features with regard to anonymity. The risk of front-running appears to be relatively high at Xetra, considering that it is a fully anonymous market allowing orders with hidden volume to be placed in the open limit order book. Despite those favorable conditions, the authors do not find evidence of widespread, systematic front-running/piggy-backing activity. Dual traders do not abuse their knowledge of hidden orders by their customers. Dual traders' personal accounts provide liquidity to the market, but contrasting previous findings, the authors are not able to support the notion that dual traders provide liquidity to their own customers.