Looking under the surface: An analysis of iceberg orders in the U.S. agricultural futures markets

Like many exchanges the Chicago Mercantile Exchange allows traders to conceal part of their limit orders, known as a hidden-limit order (HLO) or iceberg order. With HLOs, market participants have incomplete knowledge of the order book. To assess the effect of this lack of transparency in a period of highly volatile markets, we investigate the patterns and market impacts of HLOs in the U.S. corn and live cattle futures markets. Our conservative estimates indicate that HLOs represent more than 10% (20%) of the total volume in corn (live cattle) futures market. The findings show that the existence of HLOs improves market quality in multiple dimensions: driving trading volume while reducing market volatility and enhancing market liquidity. Our results are critical for regulators and exchanges as they are supportive of a degree of opacity. They are also indicative that market traders hide successfully, which can protect traders who have speed disadvantages in the era of fast trading.