Recent Trends in Trading Activity and Market Quality
UCLA Working Paper
57 Pages Posted: 31 Oct 2010 Last revised: 18 Nov 2010
Date Written: November 16, 2010
Abstract
We explore the sharp uptrend in recent trading activity and accompanying changes in market efficiency. Higher turnover has been associated with more frequent smaller trades, which have progressively formed a larger fraction of trading volume over time. Evidence indicates that secular decreases in trading costs have influenced the turnover trend. Turnover has increased the most for stocks with the greatest level of institutional holdings, suggesting professional investing as a key contributor to the turnover trend. Variance ratio tests suggest that more institutional trading has increased information-based trading. Intraday volatility has decreased and prices conform more closely to random walk in recent years. The sensitivity of turnover to past returns has increased and cross-sectional predictability of returns has decreased significantly, revealing a more widespread use of quantitative trading strategies that allow for more efficient securities prices.
Keywords: Trading Volume, Market Quality, Trading Costs, Efficiency
JEL Classification: G10
Suggested Citation: Suggested Citation
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