High Frequency Quoting: Short-Term Volatility in Bids and Offers
New York University (NYU) - Department of Finance
August 20, 2013
High-frequency changes, reversals, and oscillations induce volatility in a market’s bid and offer quotes. This volatility degrades the informational content of the quotes, exacerbates execution price risk for marketable orders, and impairs the reliability of the quotes as reference marks for the pricing of dark trades. This paper examines variance on time scales as short as fifty milliseconds for the National Best Bid and Offer (NBBO) in the US equity market. On average, in a 2011 sample, NBBO variance at the fifty millisecond time scale is approximately four times larger than can be attributed to long-term fundamental price variance. The historical picture over 2001-2011 is complex. The average volatility has not increased between 2001 and 2011, but its nature has changed. In the earlier years quote volatility is due to large spikes in bids and offers; in later years, to oscillations of low amplitude. The highest quote volatilities arise during the 2004-2006 period corresponding to the phase-in of Reg NMS and the transition to electronic trading.
Number of Pages in PDF File: 49
Keywords: high frequency trading, US equities, quotes, volatility
JEL Classification: G10, G19working papers series
Date posted: March 24, 2013 ; Last revised: August 23, 2013
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