Journal Articles

Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions

2013, forthcoming Journal of Finance

Craig W. Holden, Stacey Jacobsen

Abstract

Do fast, competitive markets yield liquidity measurement problems when using the popular Monthly Trade and Quote (MTAQ) database? Yes. MTAQ yields distorted measures of spreads, trade location and price impact compared with the expensive Daily Trade and Quote (DTAQ) database. These problems are driven by: (1) withdrawn quotes, (2) second (vs. millisecond) timestamps, and (3) other causes, including cancelled quotes. The expensive solution, using DTAQ, is first best. For financially constrained researchers, the cheap solution, using MTAQ with our new Interpolated Time technique, adjusting for withdrawn quotes, and deleting economically nonsensical states, is second best. These solutions change research inferences.

Citation

Craig W. Holden and Stacey Jacobsen, “Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions,” forthcoming in the Journal of Finance

Keywords

Millisecond, high-frequency trading, low-latency trading, NBBO, DTAQ, MTAQ, TAQ