sarkar - Two-Sided Markets and Inter-Temporal Trade...

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Two-Sided Markets and Inter-Temporal Trade Clustering: Insights into Trading Motives Asani Sarkar Senior Economist Federal Reserve Bank of New York Robert A. Schwartz Professor of Finance Zicklin School of Business Baruch College, CUNY Current Version: March, 2006 We thank Markus Brunnermeier, Michael Goldstein, Joel Hasbrouck, Milt Harris, Terry Hendershott, Murali Jagannathan, Charles Jones, Eugene Kandel, Kenneth Kavajecz, Bruce Lehmann, Albert Menkveld, Maureen O’Hara, Lasse Pederson, Ioanid Rosu, Krystin Ryqvist, Gideon Saar, George Sofianos, Shane Underwood, Jiang Wang, James Weston, Thomasz Wisniewski, and Avner Wolf. We also thank seminar participants at the AFA 2006 meetings, the NBER Market Microstructure conference of October 2005, the Microstructure conference in Norges Bank (Oslo), the 10 th Symposium on Finance, Banking and Insurance at the Universität Karlsruhe, Baruch College, Rice University, Rutgers University, SUNY Binghamton, and the Federal Reserve Bank of New York for helpful comments. The views stated here are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York, or the Federal Reserve System.
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Abstract Two-Sided Markets and Inter-Temporal Trade Clustering: Insights into Trading Motives 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 was 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.
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1 Two-Sided Markets and Inter-Temporal Trade Clustering: Insights into Trading Motives Market microstructure research has sought to draw inferences about the relative importance of alternative trading motives from the interaction between price formation and various indicators of trading activity such as the number and sign of trades, trade size and the duration between trades. Major efforts include Hasbrouck (1991) who shows that market makers, by observing trade attributes such as sign and size, can infer information from the trade sequence. Easley, Kiefer and O’Hara (1996, 1997a, 1997b), using an asymmetric information model, estimate the arrival rates of informed and uninformed traders using data on the daily number of buyer-initiated trades, seller-initiated trades, and no-trade outcomes. Dufour and Engle (2000) find that trades cluster together in time, suggesting that insiders trade quickly to prevent information leakage.
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This note was uploaded on 12/08/2011 for the course CIS 625 taught by Professor Michaelkearns during the Spring '12 term at Pennsylvania State University, University Park.

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sarkar - Two-Sided Markets and Inter-Temporal Trade...

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