Orders vs Trades: Price Effects and Size Measures

Abstract

By examining the relationship between price changes and trade sizes, we can draw conclusions on three issues. These are: (i) why order flow data is better than trade data in testing for infor Mation content; (ii) the relationship between simple permanent and temporary price effects and order size; and (iii) whether it is possible to measure infor Mation asymmetry using a simple specification test. As a subsidiary issue, we compare different order/trade size measures. We find: (i) orders are clearly better measures than trades; (ii) both permanent and temporary price effects are order‐size‐related; and (iii) it is possible to measure infor Mation asymmetry in order flow in this way, and the ability to do so increases with trading volume. (An alternative explanation for the last result is that it is purely driven by sample size.)