Liquidity Measurement Problems in Fast, Competitive 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
September 10, 2013
Journal of Finance, Forthcoming
Do fast, competitive markets yield liquidity measurement problems when using the popular Monthly Trade and Quote (MTAQ) database? Yes. MTAQ yields distorted measures of spreads, trade location, and price impact compared with the expensive Daily Trade and Quote (DTAQ) database. These problems are driven by (1) withdrawn quotes, (2) second (versus millisecond) timestamps, and (3) other causes, including cancelled quotes. The expensive solution, using DTAQ, is first-best. For financially constrained researchers, the cheap solution – using MTAQ with our new Interpolated Time technique, adjusting for withdrawn quotes, and deleting economically nonsensical states – is second-best. These solutions change research inferences.
Number of Pages in PDF File: 58
Keywords: Millisecond, high-frequency trading, low-latency trading, NBBO, DTAQ, MTAQ, TAQ
JEL Classification: C15, G12, G20
Date posted: September 29, 2012 ; Last revised: May 13, 2014
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