Latent Order Books and Hidden Liquidity Near the Market Price
Summary
The document explains the distinction between a latent order book and the displayed limit order book. A latent book represents traders’ intended buy and sell interest at different prices, including interest that has not yet been posted because those prices are far from the current market. The discussion describes iceberg orders as one example: only part of an order is visible, while additional quantity may become available when the displayed portion is executed.
It also notes that liquidity can appear and disappear around the current price, and that this changing depth contributes to order book resilience. The answer suggests that smaller orders may benefit when liquidity replenishes, but gives no measurements or conditions for that effect. The question about equality between bid and ask densities is not answered, and the document does not develop the LLOB model or specify how exchange rules affect hidden-order execution. Treat the explanation as an intuition about liquidity, not a quantitative model or universal execution guarantee.
Key ideas
- A latent order book represents intended trading interest that may not yet be displayed.
- Iceberg orders expose only part of an order while retaining additional quantity.
- Liquidity can change as prices approach, so displayed depth may not capture all available interest.
- Order book resilience can affect how smaller orders execute.
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Full text
# Revealed liquidity in latent limit order book # Revealed liquidity in latent limit order book It is stated in the LLOB model (i.e. this paper, https://arxiv.org/pdf/1105.1694.pdf ) : Our basic idea is that of a “latent order book” that at any instant of time t aggregates the total intended volume for sells at price p or above, $V+(p, t)$, and the total intended volume for buys at price $p$ or below, $V−(p, t)$. We want to emphasize that this is in general not the volume revealed in the real (observable) order book, in particular for p remote from the current price $p_t$ . It is rather the volume that would reveal itself in the order book, or as market orders, if the price came instantaneously closer to $p$. But since there is little incentive to reveal one’s intentions too early, most of the volume is latent and not revealed. Can anyone explain why there is a certain volume that is not displayed? Also, why do we have the condition $\rho_A(p_A,t)=\rho_B(p_B,t)$ if we denote $\rho_A$ and $\rho_B$ the ask and bid densities ? Thanks ## Answer by river_rat (score 0, accepted) https://quant.stackexchange.com/a/57097 Regarding unseen liquidity the easiest example would be iceberg order types. So only some percentage of the total interest of the order is visible but depending on the exchange and their priority rules a market order would execute against the entire unseen liquidity of that iceberg if it hit it. More generally, not all limit order interest is shown early in the order book. Liquidity tends to fill in and out around the current market price. It's one of the reasons smaller order sizes tend to execute better as order book resilience works in your favour.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.