Abstract
Abstract Analysis of transactions data for the Financial Times Stock Exchange (FTSE-100) stock index on the London Stock Exchange (LSE) shows that trade frequency and average trade size impact price volatility for small trades (i.e. trades of one normal market size (NMS) or less). For large trades, only trade frequency affects price volatility. In further splitting small trades by relative size, trade frequency and average trade size are found to affect price volatility only for trades close to stocks' maximum-guaranteed quoted depth. This evidence is consistent with microstructure models of dealer inventory adjustment and strategic behavior by informed traders, where dealers and uninformed traders face adverse selection costs.
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