This paper proposes a new statistical model for the analysis of data which arrive at irregular intervals. The model treats the time between events as a stochastic process and proposes a new class of point processes with dependent arrival rates. The conditional intensity is developed and compared with other self-exciting processes. Because the model focuses on the expected duration between events, it is called the autoregressive conditional duration (ACD) model. Asymptotic properties of the quasi maximum likelihood estimator are developed as a corollary to ARCH model results. Strong evidence is provided for duration clustering for the financial transaction data analyzed; both deterministic time-of-day effects and stochastic effects are important. The model is applied to the arrival times of trades and therefore is a model of transaction volume, and also to the arrival of other events such as price changes. Models for the volatility of prices are estimated with price-based durations, and examined from a market microstructure point of view.

Autoregressive conditional duration: a new model for irregularly spaced transaction data

We examine the role of high-frequency traders (HFTs) in price discovery and price efficiency. Overall HFTs facilitate price efficiency by trading in the direction of permanent price changes and in the opposite direction of transitory pricing errors, both on average and on the highest volatility days. This is done through their liquidity demanding orders. In contrast, HFTs' liquidity supplying orders are adversely selected. The direction of HFTs' trading predicts price changes over short horizons measured in seconds. The direction of HFTs' trading is correlated with public information, such as macro news announcements, market-wide price movements, and limit order book imbalances.

/pdf/high-frequency-trading-and-price-discovery-x4qkdaexz6.pdf

High-Frequency Trading and Price Discovery

A simple time-series market microstructure model is constructed within which existing models of spread components are reconciled We show that existing models fail to decompose the spread into all its components Two alternative extensions of the simple model are developed to identify all the components of the spread and to estimate the spread at which trades occur The empirical results support the presence of a large order processing component and smaller, albeit significant, adverse selection and inventory components The spread components differ significantly according to trade size and are also sensitive to assumptions about the relation between orders and trades

https://cdn.preterhuman.net/texts/unsorted2/Stock%20books%20019/Huang%20And%20Stoll-The%20Components%20Of%20The%20Bid-Ask%20Spread%20-%20A%20General%20Approach.pdf

The Components of the Bid-Ask Spread: A General Approach

The effective cost of trading is usually estimated from transaction-level data. This study proposes a Gibbs estimate that is based on daily closing prices. In a validation sample, the daily Gibbs estimate achieves a correlation of 0.965 with the transactionlevel estimate. When the Gibbs estimates are incorporated into asset pricing specifications over a long historical sample (1926 to 2006), the results suggest that effective cost (as a characteristic) is positively related to stock returns. The relation is strongest in January, but it appears to be distinct from size effects. INVESTIGATIONS INTO THE ROLE of liquidity and transaction costs in asset pricing must generally confront the fact that while many asset pricing tests make use of U.S. equity returns from 1926 onward, the high-frequency data used to estimate trading costs are usually not available prior to 1983. Accordingly, most studies either limit the sample to the post-1983 period of common coverage or use the longer historical sample with liquidity proxies estimated from daily data. This paper falls into the latter group. Specifically, I propose a new approach to estimating the effective cost of trading and the common variation in this cost. These estimates are then used in conventional asset pricing specifications with a view to ascertaining the role of trading costs as a characteristic in explaining

/pdf/trading-costs-and-returns-for-u-s-equities-estimating-2k3slf0iij.pdf

Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data

Historically, the fields of exchange-rate economics and microstructure finance have progressed independently of each other. Recent interaction, however, has given rise to a microstructure approach to exchange rates. This book focuses on the economics of financial information and how microstructure tools help to clarify the types of information most relevant to exchange rates. The microstructure approach views exchange rates from the perspective of the trading room, the place where exchange rates are actually determined. Emphasizing information economics over institutional issues, the approach departs from three unrealistic assumptions common to previous approaches: that all information relevant to exchange rates is publicly available, that all market participants are alike in their goals or in how they view information, and that how trading is organized is inconsequential for exchange rates. The book shows how exchange-rate behavior previously thought to be particularly puzzling can be explained using the microstructure approach. It contains a combination of theoretical and empirical work.

/pdf/the-microstructure-approach-to-exchange-rates-1qwrccdih9.pdf

The Microstructure Approach to Exchange Rates

This paper presents a transaction-level empirical analysis of the trading activities of New York Stock Exchange specialists. The main findings of the analysis are the following. Adjustment lags in inventories vary across stocks, and are in some cases as long as one or two months. Decomposition of specialist trading profits by trading horizon shows that the principal source of these profits is short term. An analysis of the dynamic relations among inventories, signed order flow, and quote changes suggests that trades in which the specialist participates have a higher immediate impact on the quotes than trades with no specialist participation. THE IMPORTANCE OF LIQUIDITY in securities markets motivates strong interest in the trading behavior of dealers. Dealers seek to provide liquidity in an ongoing manner and they can influence the short-run dynamics of securities prices through their trading behavior. Not surprisingly, many academic studies examine dealers' trading activities and their role in price determination. Because of the difficulty in obtaining detailed data, most (but not all) of this work is theoretical. Several important empirical issues, therefore, remain unresolved. This paper analyzes inventory adjustment, price determination, and trading profits for one important class of dealers, New York Stock Exchange (NYSE) specialists.'

The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

This paper is an expanded and updated version of NYSE Working Paper "Orders, Trades, Reports and Quotes at the New York Stock Exchange." The comments and opinions contained in this paper are those of the authors and do not necessarily reflect those of the directors, members or officers of the New York Stock Exchange, Inc. This paper does not constitute an official statement and interpretation of Exchange rules and procedures and it has no legal standing. Whenever possible, the paper provides citations to official sources. Preface This paper provides a selective description of New York Stock Exchange systems, trading rules and procedures. The paper's primary objective is to provide researchers with a detailed institutional framework for studying quote and transaction data generated by U.S. securities trading. It is also meant to serve as a guide to the New York Stock Exchange system, for economics, business and legal scholars needing a reference aid for their research. Among the topics examined are: order entry and execution, trade and quote reporting, the audit trail, SuperDot, the Intermarket Trading System, crossing orders and the upstairs positioning of large block trades. The paper provides descriptions of New York Stock Exchange systems, rules and procedures that are constantly changing, as they were at the beginning of 1993.

http://people.stern.nyu.edu/jhasbrou/Research/Working%20Papers/NYSE.PDF

New York Stock Exchange Systems and Trading Procedures

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The Trades of Market Makers: An Empirical Analysis of NYSE Specialists

New York Stock Exchange Systems and Trading Procedures