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Some brokers offer the feature of making stock orders "hidden," which effectively hides them from bid/sell/deepbooks. How exactly does this work?

See this example from Interactive Brokers.

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    Hmmm.... Care to give an example? – littleadv Jul 17 '13 at 0:51
  • Have a look at this en.wikipedia.org/wiki/Dark_liquidity . Should answer your question. – DumbCoder Jul 17 '13 at 10:04
  • I remember looking at the market depth on one of my brokers websites and seeing an * in place of a quantity at a certain bid or ask price. When I researched what the * was I found out it was a hidden order. – Victor Jul 17 '13 at 20:56
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This question is exchange specific. See below.

There typically is a broker-dark order, which emulates a real undisclosed order, in your case you would submit a limit order to the IBDARK exchange. The broker then monitors the market for you and only if the limit price is touched submits a market order to the real exchange. See IB's user guide.

On the exchange side of things, many exchanges (e.g. all of CME Group's) allow you to specify the optional Display Instruction component in your order (FIX 4.4). Along with the true quantity of the order (Qty), you can set what gets displayed in the books (DisplayQty), or when (DspWhen), or even if the order should show up at all (DspMthd = 4). See FIX NewOrderSingle.

Compliant exchanges (i.e. the ones that accept all parameters in the Display Instruction component) will record your full order, that means the matching engine will consider you wholy, but only broadcast what you specified in the market data feeds (or nothing at all in the case of an undisclosed order).

Re your liquidity concerns: The active side will use but not see your added liquidity, e.g. if you're hidden inside the spread and there's an active side it will be filled above the visible bid or below the visible offer. This is good for them (better deal) and good for the apparent (visible) liquidity because it remains untouched.

Note also that in markets with designated market makers and support for display instructions the DMM might see your full order regardless. This is to disclose scalping activities or illegal market making.

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