Stealth trading in FX markets

We investigate if and how other traders react to algorithmic order-splitting tactics. Studying over 1.4 million limit orders in the EUR/USD foreign exchange (FX) spot market, we find that stealth-trading strategies adopted by algorithmic traders seem to go detected and are perceived as more market-moving than orders of the corresponding size typically submitted by human traders. We also document that algorithmic traders appear to be more sensitive to limit orders submitted from the opposite side (free-option risk) than to the same side of the order book (non-execution risk). Once human traders have had time to react, however, the pattern reverses.