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Iceberg orders, which allow traders to hide a portion of their order size, have become prevalent in many electronic limit order markets. This paper investigates, via a real options analysis, whether small traders, who have no use for submitting iceberg orders, are better off submitting their orders to fully transparent markets which have low depth, or to more liquid markets which do permit the placement of iceberg orders by large traders. Surprisingly, we find that in the context of our model, small traders are better off submitting to fully transparent markets in spite of them being less liquid. [ABSTRACT FROM AUTHOR]

We use techniques developed to analyze the Supply Curve in liquidity models in order to analyze the accuracy of the Lee and Ready algorithm, both for highly liquid and relatively liquid stocks. Through the use of order book data combined with tick data, we are actually (somewhat tediously) able to tell whether or not a given trade is buyer or seller initiated. For those trades where such knowledge is certain, the accuracy of the Lee and Ready algorithm is not as accurate as has been assumed previously. We can essentially prove that the Lee and Ready algorithm is always at least 55% accurate, and is around 61% accurate for highly liquid stocks (i.e., the top 50 of the S&P 100). [ABSTRACT FROM AUTHOR]