The information content of the trading process

TLDR

The trade process is a stochastic sequence of transactions and idle periods that provides information to market participants and drives price changes by influencing market makers’ beliefs about stock value. The study seeks to determine whether trade size, the independence of uninformed trade, and buy/sell asymmetry influence the information content of trades. The authors fit a maximum‑likelihood model of the trade process to assess these effects. The model was estimated on transaction data from six stocks over 60 days.

Abstract

The trade process is a stochastic process of transactions interspersed with periods of inactivity. The realizations of this process are a source of information to market participants. They cause prices to move as they affect the market maker's beliefs about the value of the stock. We fit a model of the trade process that allows us to ask whether trade size is important, in that large and small trades may have different information content (they do, but this varies across stocks); whether uninformed trade is i.i.d. (it is not); and, whether large buys and large sells are equally informative (they differ only marginally). The model is fitted by maximum likelihood using transactions data on six stocks over 60 days.