Trade Size, Order Imbalance, and the Volatility-Volume Relation

Abstract

This paper examines the roles of the number of trades, trade size, and order imbalance (buyer- versus seller- initiated trades) in explaining the volatility-volume relation for a sample of NYSE and NASDAQ stocks. Contrary to some previous studies, our results reconfirm the significance of trade size, beyond that of the number of trades, in the volatility-volume relation in both markets. After controlling for the return impact of order imbalance, the volatility-volume relation becomes much weaker. This suggests that one major driving force for the volatility-volume relation stems from order imbalance. Furthermore, on the NYSE, the return impact of order imbalance increases monotonically with the trade size of order imbalance, whereas on NASDAQ, there is no such monotonic relation and the largest return impact comes from the order imbalance in maximum-sized Small Order Execution System (SOES) trades.

JEL Classification: G12, G14