High Frequency Quoting: Short-Term Volatility in Bids and Offers
New York University (NYU) - Department of Finance
January 20, 2015
At subsecond horizons bids and offers in US equity markets are more volatile than what would be implied by long-term fundamentals. In considering underlying causes, the evidence suggests that this volatility is not likely to arise from quote-stuffing, spoofing, or mixed-strategy behavior, but more likely reflects Edgeworth cycles (recurrent phases of undercutting). To assess costs and consequences, the paper proposes a model wherein traders’ random delays (latencies) interact with quote volatility to generate execution price risk and relative latency costs. Finally, over the 2001-2011 period, despite high growth in quote traffic, quote volatility does not display a strong trend.
Number of Pages in PDF File: 56
Keywords: high frequency trading, high frequency quoting, quotes, volatility
JEL Classification: G10, G19working papers series
Date posted: March 24, 2013 ; Last revised: February 23, 2015
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