Anonymous Trading

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Anonymous Trading
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Anonymous trading is a condition that allows potential trading partners to exchange goods and services without much common knowledge, either of each other’s behavior or of the goods they trade[1].

Anonymity plays a key role in market participants’ trading strategies as part of their efforts to obtain the best execution. It is also an important element of market design for exchanges, as it affects their competitiveness vis-à-vis other markets[2].

The anonymous trading for small and the biggest

Approach depending on the size of the person interested in anonymous trading[3][4][5][6]:

  • First concerns small entities: Anonymous trading is not only important to bridge the geographical distance, but also to bridge cognitive distance without incurring high transaction costs. There is no need to get involved in analyzing each other's track record in previous exchanges. The parties simply don’t' know each other and – most important – do not care about knowing each other. The cognitive resources that they save by avoiding socialization can be more beneficially invested in accumulating more private knowledge to strengthen one’s own comparative and tradable advantage. Anonymous trading allows trading partners to overcome the transaction costs, large community size and information asymmetry problems.
Anonymous trading conditions are not only necessary to enable trade between parties who do not know each other because of geographical and social distance, they also facilitate trade between parties who do know each other because of proximity but don’t want to let their business come between their social relations. (Example: Buying a computer from a friend’s store in neighborhood - when you detect any failing, the warranty arrangement allow you about care of the problem by the producer).
  • The second approach is important for big and meaningful traders want to make trades, mostly on a large scale. In their interest, the most important thing in such a case is to maintain anonymity until the very end. Stock exchanges like NASDAQ, New York Stock Exchange, and London Stock Exchange, have in their offer ideal solutions for the largest companies, similarly and dark pool allows you to keep the secret of your participation. The first approach is the most frequently chosen.
The essence of anonymous trading is that investors who want to invest large amounts of money do not want information about their intentions to come to light. The reason for this is that the competition could falsely raise the price, which would make the investment unprofitable. It is true, however, that every order is not able to be fully anonymous because there are legal regulations that must be complied with for everything to be legal.

Footnotes

  1. Martens B. (2012)
  2. Comerton-Forde C., Putniņs T.J., Mei Tang K. (2011)
  3. Martens B. (2012)
  4. Smith Y. (2010)
  5. Pagano M., Foucault T.,Roell A. (2013)
  6. Halsay D.(2013)

References

  • Comerton-Forde C.,Putniņs T. J.,Mei Tang K. (2011)., Why Do Traders Choose to Trade Anonymously?, "Journal of Financial and Quantitative Analysis", February, Sydney
  • Comerton-Forde C.,Mei Tang K. (2007)., Anonymity, frontrunning and market integrity
  • Foucault T., Roell A.,Pagano M. (2013)., Market Liquidity: Theory, Evidence, and Policy, OUP, USA
  • Grimstvedt Meling T.(2017), Anonymous Trading in Equites, No. 7/17
  • Halsey D. (2013.)., Trading the Measured Move: A Path to Trading Success in a World of Algos and High Frequency Trading, John Wiley & Sons, Hoboken
  • Martens B. (2012)., The Cognitive Mechanics of Economic Development and Institutional Change, Routledge Frontiers of Political Economy, Abingdon
  • Mizrach B.(2005)., Does SIZE Matter? Liquidity Provision by the Nasdaq Anonymous Trading Facility
  • Smith Y. (2010)., ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, St. Martin's Press, USA

Author: Dawid Kuczkowicz