The Term Structure of Liquidity Provision

45 Pages Posted: 11 Sep 2016 Last revised: 28 Feb 2019

See all articles by Jennifer S. Conrad

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School

Sunil Wahal

Arizona State University (ASU) - Finance Department

Date Written: February 14, 2019

Abstract

We examine realized spreads and price impact in clock and trade time following each trade in all common stocks from 2010-2017. The term structure of realized spreads (price impact) is sharply downward (upward) sloping, implying that (a) market maker profitability is sensitive to speed, and (b) the choice of the horizon of measurement is critical when drawing inferences from spread decompositions. The majority of the price impact of trades in large (small)-capitalization stocks takes place within 15 (60) seconds. Net profits to liquidity provision, or equivalently, net costs to liquidity demanders, decline over the sample period even at the shortest horizons that we consider: at the 100-millisecond horizon, aggregate profits decline from 1.9 basis points of total dollar volume in 2010 to 1.0 basis points in 2017.

Keywords: High frequency trading, market microstructure, market efficiency

JEL Classification: G12, G14

Suggested Citation

Conrad, Jennifer S. and Wahal, Sunil, The Term Structure of Liquidity Provision (February 14, 2019). Available at SSRN: https://ssrn.com/abstract=2837111 or http://dx.doi.org/10.2139/ssrn.2837111

Jennifer S. Conrad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Sunil Wahal (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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