Microstructure Invariance in U.S. Stock Market Trades
60 Pages Posted: 21 Mar 2010 Last revised: 18 Aug 2017
Date Written: August 28, 2016
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: Suggested Citation