LIFE Working Paper 03 – 024 “ Price Discovery in Tick Time ”

In this paper we propose a tick time model for dealer quote interactions using ultra-high-frequency data. We include duration functions to measure the time dependence of volatility as well as information. In order to asses price discovery we define several measures in tick time. These measures can be aggregated to calender time and we define a comparative measure to Hasbrouck (1995) information shares. In our empirical part we examine Island and Instinet ECNs, and three wholesale market makers for 20 actively traded stocks with varying liquidity at Nasdaq. Our results include that volatility does not increase with the duration between quote updates, and that longer durations lead to lower price discovery. In terms of price discovery we find that ECNs tend to dominate the liquid stocks, whereas market makers dominate the less liquid stocks.