We propose an experimental study to pin down the sources of hidden liquidity in electronic limit order books and analyze the implications for market design. Previous literature attributes hidden liquidity either to large liquidity traders or informed trading. We design an asset market experiment in light of recent theory treating private information in isolation. Our results rely on both trading data from experimental sessions and on a questionnaire conducted with professional traders; the main conclusion is that both private information and liquidity concerns play an important role in hidden liquidity provision. But we observe di¤erences in trading strategies in terms of prices and quantities in the presence of informed traders. Our evidence sheds light on potential ways to detect insiders who exploit market opacity. We discuss implications of private information on market quality in the context of pre-trade transparency. We also measure risk attitudes of traders and find a significant link between traders’ risk aversion and hidden liquidity supply
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