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The Sound of Silence

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  • Michael Goldstein
  • Jeffrey H. Harris
  • Mohsen Saad

Abstract

Using comprehensive electronic data collected directly from NASDAQ systems, we assess the impact of changes in electronic message traffic on predicting short-term changes in prices, spreads and quoted depth levels. We document evidence that message traffic at, and nearby, the inside quotes predicts upcoming price and quoted depth changes as much as 75 seconds in advance. Controlling for the time series properties of silent information, past price, volume, electronic communication network volume, time-of-day, and firm-specific fixed effects, we find that message traffic is strongly related to short-term returns. Our results demonstrate that modern electronic trading systems can be employed by high-frequency traders to effectively forecast short-term market conditions.

Suggested Citation

  • Michael Goldstein & Jeffrey H. Harris & Mohsen Saad, 2014. "The Sound of Silence," The Financial Review, Eastern Finance Association, vol. 49(2), pages 203-230, May.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:2:p:203-230
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    File URL: http://hdl.handle.net/10.1111/fire.12032
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    Cited by:

    1. Cziraki, Peter & Lyandres, Evgeny & Michaely, Roni, 2021. "What do insiders know? Evidence from insider trading around share repurchases and SEOs," Journal of Corporate Finance, Elsevier, vol. 66(C).
    2. Giovanni Cespa & Xavier Vives, 2022. "Exchange Competition, Entry, and Welfare," Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2570-2624.
    3. Manahov, Viktor, 2016. "A note on the relationship between high-frequency trading and latency arbitrage," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 281-296.
    4. Raymond P. H. Fishe & Richard Haynes & Esen Onur, 2022. "Resiliency in the E‐mini futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(1), pages 5-23, January.

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