The nature of price returns during periods of high market activity

TL;DR

This paper empirically investigates how high-frequency trading activity influences price return variability, order book spread, and trade impact, revealing that increased trading speed amplifies price fluctuations and order book emptiness.

Contribution

It provides detailed empirical evidence linking trading rate with return impact, spread, and order book state across multiple futures assets.

Findings

Higher trading rates increase return impact and spread.

Return variance per trade grows with faster trading activity.

Order books tend to be emptier during high activity periods.

Abstract

By studying all the trades and best bids/asks of ultra high frequency snapshots recorded from the order books of a basket of 10 futures assets, we bring qualitative empirical evidence that the impact of a single trade depends on the intertrade time lags. We find that when the trading rate becomes faster, the return variance per trade or the impact, as measured by the price variation in the direction of the trade, strongly increases. We provide evidence that these properties persist at coarser time scales. We also show that the spread value is an increasing function of the activity. This suggests that order books are more likely empty when the trading rate is high.