The Impact of a Trade on National Best Bid and Offer Quotes: A New Approach to Modeling Irregularly Spaced Data
Posted: 9 Mar 2002
In 1975, amendments to the Security Exchange Act of 1934 mandated the development of a national market system. In response to this mandate, securities listed on the New York Stock Exchange may trade simultaneously on multiple markets. This paper investigates the differential impact of trades executed in the NYSE and regional markets on the national best bid and offer quotes by using a trade and quote revision vector autoregression system. The analysis also introduces a new approach for modeling data collected on irregularly spaced intervals that explicitly estimates a rate at which lagged information is being discounted by incorporating time into the model specification. The results indicate that trades on the regional markets have a smaller, but still significant impact on the price process and that the spacing between observations contains valuable information in modeling the price process.
Keywords: price dynamics, multiple market trading, irregularly spaced data
JEL Classification: C41, G14, G18
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