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High Frequency Quoting: Short-Term Volatility in Bids and Offers

67 Pages Posted: 24 Mar 2013 Last revised: 2 Jul 2017

Joel Hasbrouck

New York University (NYU) - Department of Finance

Date Written: June 1, 2016

Abstract

At subsecond horizons bids and offers in U.S. equity markets are more volatile than what would be implied by long-term fundamentals. To assess costs and consequences, the paper suggests that traders’ random delays (latencies) interact with quote volatility to generate execution price risk and relative latency costs. Analysis of the behavior of quote setters suggests that this volatility is more likely to arise from recurrent cycles of undercutting similar to the Edgeworth cycles found in product markets, rather than mixed strategies of limit order placement.

Keywords: High-frequency trading; high-frequency quoting; Edgeworth cycles; mixed strategies

JEL Classification: G10, G19

Suggested Citation

Hasbrouck, Joel, High Frequency Quoting: Short-Term Volatility in Bids and Offers (June 1, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2237499 or http://dx.doi.org/10.2139/ssrn.2237499

Joel Hasbrouck (Contact Author)

New York University (NYU) - Department of Finance ( email )

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