Abstract
Trades’ transitory price impact is found to be robustly negative in high-frequency data: a market buy (sell) order on average pushes contemporaneous price pressure down (up). This pattern is explained through a model where liquidity providers do not always quote competitively. Lacking competitive quote updates, prices fail to immediately reflect new information, generating price pressure to offset the permanent price change that would have appeared in competitive quotes. Other novel yet counterintuitive model predictions also find support in data: A stock’s price pressure persistence and its return volatility are both lower when its liquidity providers are less competitive.
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