Microstructure Invariance in U.S. Stock Market Trades

Albert Kyle (), Anna Obizhaeva () and Tugkan Tuzun ()
Additional contact information
Albert Kyle: Robert H. Smith School of Business, University of Maryland
Tugkan Tuzun: Board of Governors of the Federal Reserve System

No w0230, Working Papers from Center for Economic and Financial Research (CEFIR)

Abstract: This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the 1993-2001 period, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0:666, strikingly close to the value of 2=3 predicted by the invariance hypothesis. Over the 2001-14 period, the estimated coefficients rise, and their average value is equal to 0:79, suggesting that the reduction in tick size in 2001 and the subsequent increase in algorithmic trading resulted in a more intense order shredding in more liquid stocks. The distributions of trade sizes, adjusted for differences in trading activity, resemble a log-normal before 2001; there is clearly visible truncation at the round-lot boundary and clustering of trades at even levels. These distributions change dramatically over the 2001-14 period with their means shifting downward. The invariance hypothesis explains about 88 percent of the cross-sectional variation in trade arrival rates and average trade sizes; additional explanatory variables include the invariance-implied measure of effective price volatility.

Keywords: market microstructure; transactions data; market frictions; trade size; tick size; order shredding; clustering; TAQ data (search for similar items in EconPapers)
JEL-codes: G10 G23 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2016-04
New Economics Papers: this item is included in nep-fmk and nep-mst
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http://www.cefir.ru/papers/WP230.pdf (application/pdf)

Related works:
Working Paper: Microstructure Invariance in U.S. Stock Market Trades (2016)
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