Microstructure Invariance in U.S. Stock Market Trades

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the period 1993-2001, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0.666, strikingly close to...

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Bibliographic Details
Published in:Policy File 2016
Main Authors: Kyle, Albert S, Obizhaeva, Anna, Tuzun, Tugkan
Format: Report
Language:English
Subjects:
Banking/Finance
Economic policy
The Federal Reserve Board
Online Access:Request full text
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Summary:This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the period 1993-2001, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0.666, strikingly close to the value of 2/3 predicted by invariance hypothesis. Over the period 2001-2014, the estimated coefficients rise, and their average value is equal to 0.79, suggesting that the reduction in tick size in 2001 and subsequent increase in algorithmic trading resulted in a more intense order shredding in more liquid stocks. The distributions of trade sizes, adjusted for differences in trading activity, resemble a log-normal before 2001; there are clearly visible truncation at the round-lot boundary and clustering of trades at even-levels. These distributions change dramatically over the period 2001-2014 with their means shifting downwards. The invariance hypothesis explains about 88% of the cross-sectional variation in trade arrival rates and average trade sizes; additional explanatory variables include invariance-implied measure of effective price volatility.