Distinguishing Stop Orders, Visible Order Book Liquidity, and Predatory Trading
Summary
The document explains how to search academic work on strategies that exploit knowledge of clustered orders. It distinguishes stop orders, which are not publicly displayed, from visible limit orders in the order book. For visible liquidity and imbalances, it recommends searching order-book research and liquidity-provision strategies; such approaches are often short horizon and may overlap with high-frequency trading. The response notes research finding that some high-frequency strategies offset imbalances through mean reversion.
It also identifies predatory trading as an academic term for trading that exploits another investor’s need to reduce a position. The cited theoretical account describes selling pressure, price overshooting, and reduced liquidation value, while warning that it focuses on consequences rather than practical implementation. The document offers search directions and conceptual distinctions, not a tested trading method. Its claims about order visibility and strategy categories are presented briefly, without discussion of market-specific rules, data limitations, or execution risk.
Key ideas
- Visible limit orders and undisclosed stop orders are different sources of order-flow information.
- Research on order books and liquidity provision is more relevant to visible order clusters than work solely on stop orders.
- Short-horizon order-book strategies may offset imbalances and overlap with high-frequency trading.
- Predatory trading describes exploiting another investor’s need to reduce a position.
- The cited predatory-trading work is theoretical and explains market effects rather than providing an implementation guide.
Tags
Full text
# What quant terms to use to search for papers about "stop-hunting" trading strategies? # What quant terms to use to search for papers about "stop-hunting" trading strategies? Are there any papers about possible trading strategies you can apply when you know where a large cluster of orders is located in the order-book? These seem to fall in the liquidity-provisioning/hunting range of strategies, is this correct? ## Answer by AnonQuant (score 3, accepted) https://quant.stackexchange.com/a/383 To search for "stop-hunting" I would search for stop orders and doing so on ssrn turned up the following: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=920687 But if you're looking for something that addresses what's in the body of the question then I'd search for something entirely different. When one knows there is a large cluster of orders in the order book, it means you're looking at limit orders and not stop orders as stop orders are never publicly disclosed. In that case you'd want to search for papers that deal with the order book, a quick search on ssrn turned up: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=565324 Usually a strategy that is looking at the order book will have a short time horizon and probably be close to if not hft in which case yes, they have something to do with liquidity provision as normally you're trying to offset imbalances. This paper using a unique data set shows that hft has mean reversion/imbalance offsetting strategies: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1641387 ## Answer by Tal Fishman (score 2) https://quant.stackexchange.com/a/2023 The academic term for this phenomenon is "predatory trading." Brunnermeier and Pederson (2005) wrote an entire paper on the topic, and you can also examine the references contained therein. > This paper studies predatory trading, trading that induces and/or exploits the need of other investors to reduce their positions.We show that if one trader needs to sell, others also sell and subsequently buy back the asset. This leads to price overshooting and a reduced liquidation value for the distressed trader. Hence, the market is illiquid when liquidity is most needed. Further, a trader profits from triggering another trader’s crisis, and the crisis can spill over across traders and across markets. The paper is mostly theoretical, covering the consequences of predatory trading rather than how to do it (which seems to be what you're interested in). Judging from the examples in their introduction, I would say that typically one first has knowledge regarding the presence of others' stop-loss orders then they place predatory orders in response, rather than dedicated "stop-hunting".
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