Why Noncompetitive Exchange Quotes Persist Far from the Best Price
Summary
The document examines unusually distant, persistent quote levels in one day of AAPL TAQ data. The accepted explanation links the venues shown to inverted pricing, where makers pay fees and takers receive rebates, and attributes the observed gaps to temporary shortages of displayed liquidity after aggressive orders sweep a price level.
Orders left at distant prices can remain visible even when there is little or no liquidity between them and the current best quote. The response also notes that a stock’s order book can have price gaps even on conventional maker-taker venues, and relates the scale of a one-cent tick to the stock’s price. This is a plausible interpretation of the plotted quotes, not a demonstrated attribution: the document provides no trade-by-trade analysis or independent verification that the listed venues or a liquidity sweep caused each observation.
Key ideas
- Aggressive orders can remove liquidity at a price level and leave distant orders exposed in the quote data.
- Persistent quotes far from the best price may reflect gaps in the order book rather than unusual regulatory requirements.
- The answer associates the observed venues with inverted maker-taker pricing.
- The proposed explanation is not supported by a detailed event-level analysis in the document.
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Full text
# Attribution of unusual persistence in noncompetitive TAQ quotes levels? # Attribution of unusual persistence in noncompetitive TAQ quotes levels? I am looking at one day of AAPL quotes (3 Dec 2012) from TAQ to examine quote-based high frequency vol estimators. However, I found that a number of exchanges, when quoting noncompetitively, seem to display persistent values that I cannot seem to justify (i.e. the levels are so far that I can't imagine they correspond to any regulation-based requirement). Can anyone reconcile this? The red vertical lines represent open and close. where ``` A = American Stock Exchange B = Boston Stock Exchange C = National (Cincinnati) Stock Exchange D = NASD (ADF) E = Market Independent (SIP - Generated) I = ISE M = Chicago Stock Exchange N = NYSE P = NYSE Arca T/Q= NASDAQ Stock Exchange S = Consolidated Tape System W = CBOE Z = BATS J = DirectEdge A K = DirectEdge X X = NASDAQ OMX PSX Y = BATS Y-Exchange Inc. ``` ## Answer by Louis Marascio (score 2, accepted) https://quant.stackexchange.com/a/11068 The venues all have one thing in common (as best I can tell from looking at your colors): they are all inverted pricing venues (a fee is paid by the maker, and a rebate is paid to the taker). What you're seeing is likely caused by temporary liquidity shortages at those venues, most commonly as a result of aggressive takers sweeping a level and wiping out posted liquidity as the stock moves. The persistent orders you are seeing are just that: some trader has posted orders at these levels, and there is simply no liquidity between the posted orders and the top that has just been wiped out. There's nothing strange going on here. A stock like AAPL does not have a dense book. If you were to look at the price levels, you'll see quite a few gaps, even on traditional maker/taker venues. Consider for a moment that a 0.01 minimum tick increment on a 600 dollar stock means every penny is worth a mere 0.16 bps!
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