Measuring Liquidity Risk in Limit-Order Book with Hidden Liquidity

Student: Minnikhanov Farid

Supervisor: Marat Z. Kurbangaleev

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2019

This thesis analyzes the presence of hidden liquidity on the stock market at the Moscow stock exchange in 2015-2016. We developed the methodology to identify iceberg limit orders in the high-frequency historical exchange data. Using historical data, we discovered that significant hidden volume is present on the Russian stock market. We found hidden liquidity in 20% of limit order books observations. Average size of discovered hidden part is 65% percent of visible volume available on the same side of the limit order book. We developed the prediction model for submission of iceberg limit orders; also, we described factors that could have predictive power. Presence of short-term trend is the most reliable predictor of hidden volume submission. Developed model estimates conditional probability of hidden volume presence in the limit order book, which could be accounted as independent measure of market liquidity risk.

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