Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions

58 Pages Posted: 29 Sep 2012 Last revised: 13 May 2014

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance

Stacey E. Jacobsen

Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance

Date Written: September 10, 2013

Abstract

Do fast, competitive markets yield liquidity measurement problems when using the popular Monthly Trade and Quote (MTAQ) database? Yes. MTAQ yields distorted measures of spreads, trade location, and price impact compared with the expensive Daily Trade and Quote (DTAQ) database. These problems are driven by (1) withdrawn quotes, (2) second (versus millisecond) timestamps, and (3) other causes, including cancelled quotes. The expensive solution, using DTAQ, is first-best. For financially constrained researchers, the cheap solution – using MTAQ with our new Interpolated Time technique, adjusting for withdrawn quotes, and deleting economically nonsensical states – is second-best. These solutions change research inferences.

Keywords: Millisecond, high-frequency trading, low-latency trading, NBBO, DTAQ, MTAQ, TAQ

JEL Classification: C15, G12, G20

Suggested Citation

Holden, Craig W. and Jacobsen, Stacey E., Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions (September 10, 2013). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2154000 or http://dx.doi.org/10.2139/ssrn.2154000

Craig W. Holden

Indiana University - Kelley School of Business - Department of Finance ( email )

Kelley School of Business
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3383 (Phone)
812-855-5875 (Fax)

HOME PAGE: http://www.kelley.iu.edu/cholden

Stacey E. Jacobsen (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business - Department of Finance ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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