Two-Sided Markets and Intertemporal Trade Clustering: Insights into Trading Motives

56 Pages Posted: 15 May 2006  

Robert A. Schwartz

Baruch College - CUNY

Asani Sarkar

Federal Reserve Bank of New York

Date Written: April 2006

Abstract

We show that equity markets are typically two-sided and that trades cluster in certain trading intervals for both NYSE and Nasdaq stocks under a broad range of conditions - news and non-news days, different times of the day, and a spectrum of trade sizes. By "two-sided" we mean that the arrivals of buyer-initiated and seller-initiated trades are positively correlated; by "trade clustering" we mean that trades tend to bunch together in time with greater frequency than would be expected if their arrival were a random process. Controlling for order imbalance, number of trades, news, and other microstructure effects, we find that two-sided clustering is associated with higher volatility but lower trading costs. Our analysis has implications for trading motives, market structure, and the process by which new information is incorporated into market prices.

Keywords: two-sided markets, trade clustering, trading motives, equity markets, volatility, trading costs

JEL Classification: G10, G14

Suggested Citation

Schwartz, Robert A. and Sarkar, Asani, Two-Sided Markets and Intertemporal Trade Clustering: Insights into Trading Motives (April 2006). FRB of New York Staff Report No. 246. Available at SSRN: https://ssrn.com/abstract=902358 or http://dx.doi.org/10.2139/ssrn.902358

Robert A. Schwartz

Baruch College - CUNY ( email )

Zicklin School of Business
17 Lexington Avenue
New York, NY 10010
United States
646-312-3467 (Phone)
646-312-3530 (Fax)

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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