Competitive Quote Flipping and Trade Clusters

61 Pages Posted: 13 Aug 2020 Last revised: 29 Oct 2020

See all articles by Raymond P.H. Fishe

Raymond P.H. Fishe

University of Richmond - E. Claiborne Robins School of Business

John S. Roberts

Community Futures Trading Commission

Date Written: June 1, 2020

Abstract

We model the decision to exhaust depth by high speed traders, which either flips the best bid or ask quote to the opposite side or widens the spread. Such events are common and often revert to the previous best quote levels. Consistent with the model, such quote flipping results in large trade clusters at the competitive equilibrium. Using the order book for the S&P E-mini futures contract, we document quote changes and find on average 78% of these revert to previous best quote levels within 3 seconds and about one-third of these events are isolated over a 40 millisecond window from other quote changes. Trade clusters are found before a quote change. Specifically, 18.1% of volume arises within 2 milliseconds of an isolated, reverting change in quotes. Empirically, this model explains at least as much quote change activity as does a liquidity replacement view.

Keywords: Order Book, Depth, Quote Flippers, Clustering, E-Mini Futures

JEL Classification: G10, G13

Suggested Citation

Fishe, Raymond P.H. and Roberts, John S., Competitive Quote Flipping and Trade Clusters (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3652630 or http://dx.doi.org/10.2139/ssrn.3652630

Raymond P.H. Fishe (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Road
Richmond, VA 23173
United States
804-289-8549 (Phone)

John S. Roberts

Community Futures Trading Commission ( email )

United States

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