Microstructure Invariance in U.S. Stock Market Trades

60 Pages Posted: 21 Mar 2010 Last revised: 18 Aug 2017

See all articles by Albert S. Kyle

Albert S. Kyle

University of Maryland

Anna A. Obizhaeva

New Economic School (NES)

Tugkan Tuzun

Board of Governors of the Federal Reserve System

Date Written: August 28, 2016

Abstract

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over 1993-2001, monthly regression coefficients of the log of the trade arrival rate on the log of trading activity have an almost constant value of 0.666, close to the value of 2/3 predicted by market microstructure invariance. Over 2001-2014, after tick size was reduced to one cent and algorithmic trading increased, the coefficients increase to about 0.79. The invariance hypothesis explains about 88 percent of the variation in monthly average trade sizes. An invariance-implied measure of effective price volatility provides additional explanatory power.

Keywords: trading activity, trade size, trade frequency

JEL Classification: G10

Suggested Citation

Kyle, Albert (Pete) S. and Obizhaeva, Anna A. and Tuzun, Tugkan, Microstructure Invariance in U.S. Stock Market Trades (August 28, 2016). Available at SSRN: https://ssrn.com/abstract=1107875 or http://dx.doi.org/10.2139/ssrn.1107875

Albert (Pete) S. Kyle

University of Maryland ( email )

College Park
College Park, MD 20742
United States

Anna A. Obizhaeva (Contact Author)

New Economic School (NES) ( email )

100A Novaya ul
Moscow, Skolkovo 143026
Russia

Tugkan Tuzun

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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