Skip to main content
SpringerLink
Log in

The Dynamics of Security Trades, Quote Revisions, and Market Depths for Actively Traded Stocks

Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Cite this article

Abstract

We examine the dynamics of return volatility, trading volume, and depth—in an intraday setting for a sample of actively traded NYSE and NASDAQ stocks. We show that depth is a useful intervening variable and mitigates the impact of trading activity on price volatility. Furthermore, depth is affected by the perception of prevailing information asymmetry between informed and uninformed traders. We demonstrate empirically that the NYSE supplies greater depth under conditions of high, perceived information asymmetry as compared to NASDAQ. NASDAQ makes up for this deficiency by its capability of managing large volume shocks without a major decline in depth.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

References

  • Admati, A. and P. Pfleiderer, “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies 1, 3–40, (1988).

    Article  Google Scholar 

  • Ahn, H. J., K. H. Bae and K. Chan, “Limit Orders, Depth, and Volatility: Evidence from the Stock Exchange of Hong Kong.” Journal of Finance 56, 767–788, (2001).

    Article  Google Scholar 

  • Barclay, M. J., W. G. Christie, J. H. Harris, E. Kandel and P. H. Schultz, “Effects of Market Reform on the Trading Costs and Depths of NASDAQ Stocks.” Journal of Finance 54, 1–34, (1999).

    Article  Google Scholar 

  • Bessembinder, H. and P. Seguin, “Futures-Trading Activity and Stock Price Volatility.” Journal of Finance 47, 2015–2034, (1992).

    Google Scholar 

  • Bessembinder, H. and P. Seguin, “Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets.” Journal of Financial and Quantitative Analysis 28, 21–39, (1993).

    Google Scholar 

  • Brock, W. and A. Kleidon, “Periodic Market Closure and Trading Volume: A Model of Intraday Bids and Asks.” Journal of Economic Dynamics and Control 16, 451–489, (1992).

    Article  Google Scholar 

  • Chan, K., Y. Chung and W. Fong, “The Informational Role of Stock and Option Volume.” Review of Financial Studies 15, 1049–1075, (2002).

    Article  Google Scholar 

  • Chan, K. and W. Fong, “Trade Size, Order Imbalance, and the Volatility-Volume Relation.” Journal of Financial Economics 57, 247–273, (2000).

    Article  Google Scholar 

  • Chan, K., W. Christie and P. Schultz, “Market Structure and the Intraday Pattern of Bid-Ask Spreads for NASDAQ Securities.” Journal of Business 68, 35–60, (1995).

    Article  Google Scholar 

  • Chung, K. H. and C. Chuwonganant, “Tick Size and Quote Revisions on the NYSE.” Journal of Financial Markets 5, 391–410, (2002).

    Article  Google Scholar 

  • Chung, K. H. and Van Ness R. A., 2001, “Order Handling Rules, Tick Size, and the Intra-day Pattern of Bid-ask Spreads for NASDAQ Stocks,” Journal of Financial Markets, 4, 143–161.

    Article  Google Scholar 

  • Chung, K. H., B. F. Van Ness and R. A. Van Ness, “Can the Treatment of Limit Orders Reconcile the Differences in Trading Costs between NYSE and NASDAQ Issues?” Journal of Financial and Quantitative Analysis 36, 267–286, (2001).

    Google Scholar 

  • Chung, K. H., B. F. Van Ness and R. A. Van Ness, “Spreads, Depths, and Quote Clustering on the NYSE and NASDAQ: Evidence After the 1997 Securities and Exchange Commission Rule Changes.” Financial Review 37, 481–505, (2002).

    Article  Google Scholar 

  • Copeland, T. and D. Galai, “Information Effects on the Bid-Ask Spread.” Journal of Finance 38, 1457–1469, (1983).

    Google Scholar 

  • Dufour, A. and R. F. Engle, “Time and Price Impact of a Trade.” Journal of Finance 55, 2467–2498, (2000).

    Article  Google Scholar 

  • Easley, D. and M. O’Hara, “Price, Trade Size, and Information in Securities Markets.” Journal of Financial Economics 19, 69–90, (1987).

    Article  Google Scholar 

  • Easley, D., M. O’Hara and P. Srinivas, “Option Volume and Stock Prices: Evidences on Where Informed Traders Trade.” Journal of Finance 53, 431–465, (1998).

    Article  Google Scholar 

  • Foster, F. and S. Vishwanathan, “A Theory of Interday Variations in Volumes, Variances and Trading Costs in Securities Markets.” The Review of Financial Studies 3, 593–624, (1990).

    Article  Google Scholar 

  • Foster, F. and S. Vishwanathan, “Variations in Trading Volume, Return Volatility and Trading Costs: Evidence on Recent Price Formation Models.” Journal of Finance 48, 187–211, (1993).

    Google Scholar 

  • Fung, H. and G. Patterson, “The Dynamic Relationship of Volatility, Volume, and Market Depth in Currency Futures Markets.” Journal of International Financial Markets, Institutions and Money 9, 33–59, (1999).

    Google Scholar 

  • Glosten, L. and L. Harris, “Estimating the Components of the Bid/Ask Spread.” Journal of Financial Economics 21, 123–142, (1988).

    Article  Google Scholar 

  • Glosten, L. and P. Milgrom, “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics 14, 71–100, (1985).

    Article  Google Scholar 

  • Goldstein, M. A. and K. A. Kavajecz, “Eighths, Sixteenths, and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE.” Journal of Financial Economics 56, 125–149, (2000).

    Article  Google Scholar 

  • Harris, L., “A Day-end Transaction Price Anomaly.” Journal of Financial and Quantitative Analysis 24, 29–45, (1989).

    Google Scholar 

  • Hasbrouck, J., “Trades, Quotes, Inventories, and Information.” Journal of Financial Economics 22, 229–252, (1988).

    Article  Google Scholar 

  • Hasbrouck, J., “Measuring the Information Content of Stock trades.” Journal of Finance 46, 179–207, (1991).

    Google Scholar 

  • Hasbrouck, J. and T. Ho, “Order Arrival, Quote Behavior and the Return Generating Process.” Journal of Finance 42, 1175–1199, (1987).

    Google Scholar 

  • Ho, T. and H. Stoll, “Optimal Dealer Pricing Under Transactions and Return Uncertainty.” Journal of Financial Economics 9, 47–73, (1981).

    Article  Google Scholar 

  • Ho, T. and H. Stoll, “The Dynamics of Dealer Markets under Competition.” Journal of Finance 38, 1053–1074, (1983).

    Google Scholar 

  • Huang, R. and H. Stoll, “Market Microstructure and Stock Return Predictions.” Review of Financial Studies 7, 179–213, (1994).

    Article  Google Scholar 

  • Huang, R. and H. Stoll, “Dealer versus auction markets: A paired comparison of execution costs on NASDAQ and the NYSE.” Journal of Financial Economics 41, 313–357, (1996).

    Article  Google Scholar 

  • Huang, R. and H. Stoll, “The Components of the Bid-Ask Spread: A General Approach.” Review of Financial Studies 10, 995–1034, (1997).

    Article  Google Scholar 

  • Jain, P. and G. Joh, “The Dependence Between Hourly Prices and Trading Volume.” Journal of Financial and Quantitative Analysis 23, 269–283, (1988).

    Google Scholar 

  • Jones, M. J. and M. L. Lipson, “Sixteenths: Direct Evidence on Institutional Execution Costs.” Journal of Financial Economics 59, 253–278, (2001).

    Article  Google Scholar 

  • Jones, M. J., G. Kaul and M. L. Lipson, “Transactions, Volume, and Volatility.” Review of Financial Studies 7, 631–651, (1994).

    Article  Google Scholar 

  • Karpoff, J. M., “The Relation Between Price Changes and Trading Volume: A Survey.” Journal of Financial and Quantitative Analysis 22, 109–126, (1987).

    Google Scholar 

  • Kavajecz, K. A., “The Specialist’s Quoted Depth and the Limit Order Book.” Journal of Finance 54, 747–771, (1999).

    Article  Google Scholar 

  • Kumar, R., A. Sarin and K. Shastri, “The Impact of Options Trading on the Market Quality of the Underlying Security: An Empirical Analysis.” Journal of Finance 53, 717–732, (1998).

    Article  Google Scholar 

  • Kyle, A., “Continuous Auctions and Insider Trading,” Econometrica, 53, (1985) 1315–1335.

    Google Scholar 

  • Lee, C. and M. Ready, “Inferring Trade Direction from Intradaily Data.” Journal of Finance 46, 733–746, (1991).

    Google Scholar 

  • Lee, C., B. Mucklow and M. Ready, “Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis.” Review of Financial Studies 6, 345–374, (1993).

    Article  Google Scholar 

  • Madhavan, A., M. Richardson and M. Roomans, “Why Do Security Prices Changes A Transaction Analysis of NYSE Stocks.” Review of Financial Studies 10, 1035–1064, (1997).

    Article  Google Scholar 

  • Madhavan, A. and S. Smidt, “An Analysis of Changes in Specialist Inventories and Quotations.” Journal of Finance 48, 1595–1628, (1993).

    Google Scholar 

  • McInish, T. and R. Wood, “An Analysis of Intraday Patterns in Bid/Ask Spreads for NYSE Stocks.” Journal of Finance 47, 753–764, (1992).

    Google Scholar 

  • Stoll, H., “Dealer Inventory Behavior: An Empirical Investigation of NASDAQ/NMS Stocks.” Journalof Financial and Quantitative Analysis 11, 359–380, (1976).

    Google Scholar 

  • Stoll, H., “The Supply of Dealer Services in Securities Markets.” Journal of Finance 33, 1133–1151, (1978).

    Google Scholar 

  • Stoll, H., “Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests.” Journal of Finance 44, 115–134, (1989).

    Google Scholar 

  • Wood, R., T. McInish and J. Ord, “An Investigation of Transaction Data for NYSE Stocks.” Journal of Finance 40, 723–741, (1985).

    Google Scholar 

  • Xu, X. E. and C. Wu, “The Intraday Relation between Return Volatility, Transactions and Volume.” International Review of Economics and Finance 8, 375–397, (1999).

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Professor of Banking and Finance, School of Business Administration, Portland State University, Portland, OR, 97207-0751, USA

    Shafiqur Rahman

  2. Associate Professor of Banking and Finance, Nanyang Business School, Nanyang Tech University, Singapore

    Chandrasekhar Krishnamurti

  3. Assistant Professor of Finance, San Francisco State University, San Francisco, CA, USA

    Alice C. Lee

Authors
  1. Shafiqur Rahman
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Chandrasekhar Krishnamurti
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Alice C. Lee
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Shafiqur Rahman.

Additional information

JEL Classification: C32, D82, G10

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Rahman, S., Krishnamurti, C. & Lee, A.C. The Dynamics of Security Trades, Quote Revisions, and Market Depths for Actively Traded Stocks. Rev Quant Finan Acc 25, 91–124 (2005). https://doi.org/10.1007/s11156-005-4244-x

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-005-4244-x

Keywords

search

Navigation