Microstructure Invariance in U.S. Stock Market Trades

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over 1993-2001, monthly regression coefficients of the log of the trade arrival rate on the log of trading activity have an almost constant value of 0.666, close to the value of 2/3 predicted by market microstructure invariance. Over 2001-2014, after tick size was reduced to one cent and algorithmic trading increased, the coefficients increase to about 0.79. The invariance hypothesis explains about 88 percent of the variation in monthly average trade sizes. An invariance-implied measure of effective price volatility provides additional explanatory power