Order Exposure and Parasitic Traders

Abstract

The art of trading lies in knowing when and how to expose trading interest. Exposure decisions are the most important decisions large traders make. Traders who never expose never trade. Traders who over-expose generate high transaction costs. Traders expose to encourage other traders to trade with them. They avoid exposing when they fear that other traders will front-run their orders or avoid trading with them. This paper examines the costs and benefits of order exposure, the means by which traders manage it, how brokers and exchanges can help them solve this problem, and some empirical evidence that suggests that exchange rules affect trader order exposure decisions.

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