In my experience hidden orders help a great deal. They are not perfect but there are quite a few situations where I want to take profits in a fast moving stock (lets say I'm short), if I put a displayed limit order, sometimes the stock trades down to my price and it stops there(The HFTs know when there are orders from humans sitting there waiting to be filled). Then I'm exposed to adverse selection, I get filled when it is about to tank some more and not when its about to reverse (those fills I don't get it). Hidden orders (specially if using 2-3 ECNs) can help against this crap. I haven't done extensive backtesting or a broad study on this but I don't think I need to, in my day to day experince I can tell when the hidden order has prevented some HFT bs from occurring Just my 2 cents
This is what i'm planning to do with my existing strategy-just spread up hidden orders where they are native to exchange(ISLAND,ARCA,BATS)(yeah..and pay triple commission) and see what happens
Hidden orders won't help if you are trying to capture the spread market making, that's when they will hit you for 3 shares and game you up because your order will stay out there for a long-time, at some point they will odd lot you. But in a fast moving situation where you just want to take profits you have 4 options: -Hidden limit order in 2-3 ECNs -Displayed order in a ECN that provides an incentive for others to hit you (BX, EDGA) -Displayed order in a ECN that pays you a good rebate (BATS, ARCA) -Pay the spread at the level you want to take profits at For larger spread stocks (usually high priced stocks but sometimes less liquid small caps as well) I find the least bad option is to use the hidden order. If you are trading SPY or something with a 1 cent spread, hidden orders won't do a thing, hitting the spread might just do it. The second least bad is harder to tell and it would depend on the situation. This thread makes me wish I had written more about hidden orders in my book Traders of the New Era, maybe I will do it in the second edition.
At the very least a trader should be aware of all these tools in the toolbox in terms of order execution so he can know which type of order is best for each situation. As the markets change (and the fact that odd lots are now displayed in the T&S might lead to some changes in the markets when Reg NMS gets changed, given that the whole thing is so absurd and manipulative) the trader can use different tools in different situations and be able to adapt more effectively