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Trading Takes Time

Author

Listed:
  • Liang Peng

    (Department of Finance)

Abstract

A standard assumption of market microstructure models is that traders process the information content of past trading activities instantly. In a more realistic setting, they need time to do so and market makers are aware of that. Therefore, clustering trades with shorter duration (waiting time before a trade) are less likely to convey new information because traders may not have enough time to learn from the preceding trades. However, reversing trades may still be informative. Consequently, there is a positive relation between price impact and trade duration for clustering trades but not for reversing trades. This paper develops a price impact model and estimates it using trading data of 10 actively traded stocks.We find strong evidence of both phenomena. The positive relation between price impact and trade duration for clustering trades is statistically and economically significant. In fact, the price impact of a trade with duration longer than 30 seconds is about four times higher than a trade with much shorter duration. Our analysis suggests that market makers believe that traders presently need at least 30 seconds to digest the information content of the preceding trade.

Suggested Citation

  • Liang Peng, 2001. "Trading Takes Time," Yale School of Management Working Papers ysm234, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm234
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    Citations

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    Cited by:

    1. Locke, Peter R. & Sarajoti, Pattarake, 2004. "Aggressive dealer pricing," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(4), pages 559-573, September.
    2. 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.
    3. Chen, Tao & Li, Jie & Cai, Jun, 2008. "Information content of inter-trade time on the Chinese market," Emerging Markets Review, Elsevier, vol. 9(3), pages 174-193, September.
    4. Furfine, Craig, 2007. "When is inter-transaction time informative?," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 310-332, June.
    5. Craig H. Furfine, 2003. "When is inter-transaction time informative?," Working Paper Series WP-03-04, Federal Reserve Bank of Chicago.

    More about this item

    Keywords

    Market Microstructure; Price Impact; Trade Duration; Time;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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