67 Pages Posted: 24 Mar 2013 Last revised: 2 Jul 2017
Date Written: June 1, 2016
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: 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