We develop a microstructure model of a public and order-driven exchange that competes for order flow with off-exchange trading mechanisms. Large investors have the strategic freedom to either trade in the primary or in the off-exchange market. Liquidity suppliers in the primary market face a trade-off between the costs and benefits of order exposure. If liquidity suppliers display their trading intentions, they can elicit order flow from latent investors and lead to mutually beneficient trades. In contrast, hidden orders can lead to significant adverse effects for the individual and the market as a whole. Hidden orders reduce the likelihood to attract (latent) counterparties and thus miss out on "frictionless" trades. Ultimately, traders have to cancel unfilled hidden orders and switch to more aggressive market orders to meet their trading targets. The switch from passive to aggressive trading does not only increase transaction costs for the trader but also deteriorates overall market quality. Hidden orders can induce substantial price fluctuations and may harm price efficiency.
