Hide-and-Seek: Hidden Liquidity on U.S. Exchanges

December 21, 2022

Hidden orders were a major topic of discussion in past years. Despite the growth of off-exchange trading Cboe has observed a corresponding rise in on-exchange hidden volumes. It was previously very difficult to track hidden exchange volumes because they were intended to be undetected, until the Securities Exchange Commission (SEC) started providing empirical data through its now-public Market Information Data Analytics System (MIDAS). The Cboe North American Execution Consulting team has analyzed this data to provide a better picture of the evolving trends in on-exchange hidden activity.

What is a hidden order, exactly? Most exchanges, Cboe equities exchanges included, offer traders the ability to hide a portion or the entirety of their order when trading on displayed markets. Exchanges provide this option for a multitude of reasons, including but not limited to, minimizing market impact and reducing the amount of position information revealed. However, traders who choose to hide their orders are accepting that displayed orders of the same price will receive higher execution priority.

As illustrated below, over the past decade the percentage of on-exchange volume traded as hidden climbed from approximately 9% in 2012 to upwards of 15% by September 2022. Hidden orders in single-listed stocks and hidden orders in ETFs have grown at different rates but both contribute the increase in hidden order volume. Notably, 8.9% of single-listed stocks were executed as hidden orders a decade ago. By September 2022, 17.5% of single-listed stock volume was hidden., Comparatively, 7.4% of ETFs were executed as hidden orders in 2012, which has risen to 11.3% in that same time period. The increase in hidden orders around the beginning of the pandemic is also notable. At that time, hidden order volume in overall stocks reached north of 18% and single-listed stocks breached 20% of hidden volume on-exchange.


While the level of hidden order volume has remained elevated since March 2020, this is as much a function of overall elevated trading volumes as it is the percentage increase in on-exchange hidden volumes. Exchange hidden market share has remained consistent, with

Cboe making up roughly 28% of hidden volume in 2022 year-to-date, trailing NYSE at 31% and Nasdaq at 37%.


What is more interesting, however, is how much of each exchange group’s volume was hidden. The general trend here matches that of overall equities, with volume on the three largest exchange groups increasing from 12 to 14% at the beginning of 2017 to 16 to 19% as of third-quarter 2022. As illustrated below, Cboe has narrowly outpaced NYSE in the last three consecutive quarters to become the group with the second largest percent of its market share attributed to hidden volume.


Looking at Cboe exchanges specifically, there was a steady increase in the percentage of hidden orders executed at midpoint, with the overall monthly average has rising from approximately 40% across the four U.S. equities exchanges (EDGA, EDGX, BYX, BZX) to more than 50% as of October 2022. During this period, orders executed at either the bid or ask — collectively referred to as “at the quote” — remained stable, at approximately 30%, throughout fluctuations in overall hidden volume that ranged from 79 million to 148 million average daily volume (ADV). In recent months that volume has hovered around 113 million ADV.

Source: Cboe

The increasing relevance of midpoint execution for hidden orders on Cboe’s exchanges can be partially attributed to Cboe’s recent additional offerings to help improve execution quality at midpoint, including QDP Quote Depletion Protection (QDP) and Periodic Auctions.

QDP is an optional instruction on Midpoint Discretionary Orders (MDO) that disables the discretionary range of the order for a period of time, if the quote indicates that price movement may result in more aggressive executions. QDP’s signal is accurate the majority of the time and helps provide several basis points of price protection for MDOs. Since 2021, the increased adoption of this feature has translated to strong growth in ADV, mainly on Cboe EDGX®. The percentage of QDP-executed volume that occurs at midpoint is increasing in tandem with the trend of midpoint for hidden orders, especially on EDGX®, where almost 90% of volume is executed at midpoint.

Source: Cboe

Periodic Auctions are currently exclusive to Cboe BYX during regular trading hours, facilitating on-exchange liquidity by providing price-forming auctions throughout the day. Two new order types have been created: Periodic Auction Only and Periodic Auction Eligible. Periodic Auction Only orders only execute in periodic auctions, eligible when matched with a contra side periodic auction order. Alternatively, Periodic Auction Eligible orders can still trade in the continuous book, but will lock in and trade only against auctions upon initiation for the duration of the auction. Periodic Auctions serve to help attract buyers and sellers in symbols with wider spreads or less liquidity in an equal and fair manner for all participants.

Based on this analysis, the growth in hidden orders on displayed exchanges is not likely to slow down soon. As investors continue to seek hidden orders, Cboe’s innovative trading mechanisms provide the right solutions to improve execution quality.

For questions or more information, please reach out to your Cboe representative to learn how we can help enhance your trading experience.

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