April 2016

Microstructure Invariance in U.S. Stock Market Trades

Albert S. Kyle, Anna A. Obizhaeva, and Tugkan Tuzun


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.

Accessible materials (.zip)

Keywords: TAQ data, market frictions, market microstructure, order shredding, tick size, trade size, transactions data

DOI: http://dx.doi.org/10.17016/FEDS.2016.034

PDF: Full Paper

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Last Update: June 19, 2020