Question of the Week - August 9th 2016

How do top of book depth and number of quotes relate to volatility?


Chart 1: Average Top of Book Depth Size – S&P 500 Constituents (left) Russell 2000 Constituents (right)


Chart 2: Average Number of Quotes in Five Minute Intervals – S&P 500 Constituents (left) Russell 2000 Constituents (right)

  • Overall market volatility increases the difficulty of trading and the likelihood of increased trading costs. We examine two market microstructure components that directly affect trading environments—top of book depth and number of quotes—to study their relationship with volatility. We use Q1 2015 and Q1 2016 to approximate low volatility and high volatility environments, respectively.
  • The first chart shows top of book depth for S&P 500 and Russell 2000 constituents is higher, on average, during low volatility periods compared to high volatility. S&P 500 top of book depth sizes are considerably lower than Russell 2000, though depth increased more on a relative basis in periods of high volatility. 
  • We note a dramatic increase in the average number of quotes in a five minute interval for S&P 500 stocks in volatile periods. During periods of high volatility, both available liquidity and the demand for liquidity are notably higher, creating an environment where price movements can happen more rapidly. 

SPY and IWM constituents were equally weighted to represent the S&P 500 and Russell 2000 indices. Data was sourced from ITG’s 5 Minute Bin Intraday Data products. Stocks without valid 21-day median volume metics were excluded from the results.


Refer to ITG Equity Related Analytics for information on available Equity Related Analytics.

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