The Relative Contribution of Ask and Bid Quotes to Price Discovery

Abstract

For both the Spanish Stock Exchange (SSE) and the NYSE, we provide robust evidence of daily asymmetries in the contribution of ask and bid quotes to price discovery. These asymmetries are non-negligible, in the sense that they are not driven by noise. Asymmetries happen in 47.7% (62.8%) of the stock-day observations in our SSE (NYSE) sample. Asymmetries are of larger average magnitude among small caps. We also show that the ask (bid) quote leads in days with substantial excess of buying (selling) initiated trading, although the relationship has weakened over time and with the advent of high-frequency trading.

Keywords: Price discovery, order imbalance, quote quality, information shares, order driven markets, limit order book, NYSE, market microstructure

JEL Classification: G1