56 Pages Posted: 24 Mar 2013 Last revised: 23 Feb 2015
Date Written: January 20, 2015
At subsecond horizons bids and offers in US equity markets are more volatile than what would be implied by long-term fundamentals. In considering underlying causes, the evidence suggests that this volatility is not likely to arise from quote-stuffing, spoofing, or mixed-strategy behavior, but more likely reflects Edgeworth cycles (recurrent phases of undercutting). To assess costs and consequences, the paper proposes a model wherein traders’ random delays (latencies) interact with quote volatility to generate execution price risk and relative latency costs. Finally, over the 2001-2011 period, despite high growth in quote traffic, quote volatility does not display a strong trend.
Keywords: high frequency trading, high frequency quoting, quotes, volatility
JEL Classification: G10, G19
Suggested Citation: Suggested Citation