Liquidity, Information, and Infrequently Traded Stocks

TLDR

The study examines whether variations in information-based trading explain spread differences between actively and infrequently traded stocks. The authors estimate information-based trading risk on NYSE stocks by applying a novel empirical method that analyzes trade data to assess information arrival frequency, trading composition, and market depth across volume deciles. They find that high-volume stocks experience lower probability of information-based trading, and regressions show this trading activity significantly affects bid‑ask spreads.

Abstract

ABSTRACT This article investigates whether differences in information‐based trading can explain observed differences in spreads for active and infrequently traded stocks. Using a new empirical technique, we estimate the risk of information‐based trading for a sample of New York Stock Exchange (NYSE) listed stocks. We use the information in trade data to determine how frequently new information occurs, the composition of trading when it does, and the depth of the market for different volume‐decile stocks. Our most important empirical result is that the probability of information‐based trading is lower for high volume stocks. Using regressions, we provide evidence of the economic importance of information‐based trading on spreads.