Trading Costs and Priced Illiquidity in High Frequency Trading Markets

We develop measures of stock-specific trading activity based on durations of sequences of consecutive trades with fixed cumulative values. Trade sizes and signed-trade imbalances rise with activity, while price impacts generally fall, but not always, due to endogenous variation in liquidity provision and consumption. After controlling for this endogenity, price impacts uniformly fall with predicted activity. The sensitivity of price impacts to changes in activity becomes more similar across stocks post-RegNMS, but price impacts diverge, falling (rising) for liquid (illiquid) stocks. In asset pricing models, our illiquidity measure outperforms standard measures and we find illiquidity premia rise as trading costs diverge.