Abstract

http://ssrn.com/abstract=2019177
 
 

References (35)



 


 



Liquidity Measure Distortions in Fast Markets: Expensive and Cheap Solutions


Craig W. Holden


Indiana University - Kelley School of Business - Department of Finance

Stacey E. Jacobsen


Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance

March 9, 2012


Abstract:     
We investigate how the increase in speed of U.S. equity markets has distorted liquidity measures. We find that the widely-used Monthly Trade and Quote (MTAQ) database yields a percent effective spread 43% higher than our benchmark, a quoted spread that is nonpositive nine times more often, and a potential cost of poor routing decisions of $8.4 Billion/year. We test ways to eliminate or mitigate these distortions. We find that the best solution is to use the expensive Daily Trade and Quote database. If a researcher is financially constrained, then the second best solution is to use MTAQ with our new Interpolated Time technique and two other techniques.

Number of Pages in PDF File: 48

Keywords: millisecond, high-frequency trading, low-latency trading, NBBO, DTAQ, MTAQ, TAQ

JEL Classification: C15, G12, G20

working papers series


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Date posted: March 10, 2012  

Suggested Citation

Holden, Craig W. and Jacobsen, Stacey E., Liquidity Measure Distortions in Fast Markets: Expensive and Cheap Solutions (March 9, 2012). Available at SSRN: http://ssrn.com/abstract=2019177 or http://dx.doi.org/10.2139/ssrn.2019177

Contact Information

Craig W. Holden (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)
HOME PAGE: http://www.kelley.iu.edu/cholden

Stacey E. Jacobsen
Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
Feedback to SSRN


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