Review of Quantitative Finance and Accounting, 25: 91–124, 2005
2005 Springer Science + Business Media, Inc. Manufactured in The Netherlands.
The Dynamics of Security Trades, Quote Revisions,
and Market Depths for Actively Traded Stocks
Professor of Banking and Finance, School of Business Administration, Portland State University, Portland, OR,
97207-0751, USA, Tel.: 503.725.3715; Fax: 503.725.5850
Associate Professor of Banking and Finance, Nanyang Business School, Nanyang Tech University, Singapore
ALICE C. LEE
Assistant Professor of Finance, San Francisco State University, San Francisco, CA, USA
Abstract. We examine the dynamics of return volatility, trading volume, and depth—in an intraday setting for
a sample of actively traded NYSE and NASDAQ stocks. We show that depth is a useful intervening variable and
mitigates the impact of trading activity on price volatility. Furthermore, depth is affected by the perception of
prevailing information asymmetry between informed and uninformed traders. We demonstrate empirically that
the NYSE supplies greater depth under conditions of high, perceived information asymmetry as compared to
NASDAQ. NASDAQ makes up for this deﬁciency by its capability of managing large volume shocks without a
major decline in depth.
Keywords: intra-day dynamics, depth, volatility, trading activity, vector auto-regression
JEL Classiﬁcation: C32, D82, G10
The association between trading activity and price volatility has been the subject of much re-
Trades are commonly dichotomized into liquidity-driven and information-
driven transactions. While liquidity-driven trades are a source of trading friction resulting
in transitory price changes, information-driven trades convey information to other traders
and result in permanent changes in stock prices. Thus the familiar Wall Street adage “it
takes volume to move prices”.
Other papers infer causality to run in the reverse direction
from price volatility to trading activity owing to dealer inventory control behaviour.
Recent work has added a third dimension to this research by including depth.
represents the proclivity of uninformed traders to supply liquidity. It is a useful intervening
variable since it has the potential to mitigate the impact of trading activity on price volatility.
The provision of depth is affected by the perception of prevailing information asymmetry
between informed and uninformed traders. An increase in trading activity causes depth