Efficient or Not? Price Measures in Market Microstructure

Efficient or Not? Price Measures in Market Microstructure

We systematically evaluate the qualitative and quantitative properties of five price measures commonly used in market microstructure and assess their informational efficiency in approximating an asset's true value using quote and trade data from German stocks. By using return predictability as an inverse measure of efficiency, we find that more sophisticated measures, such as the micro-price, reflect public information within two seconds. In contrast, established price measures like the transaction price and midpoint require at least 30 seconds to incorporate public information. Relying on inefficient proxies for an asset's true value can introduce significant and systematic biases in study results and trading outcomes, leading to overestimated transaction costs and unfair dark pool execution prices. Our findings offer practical guidance for selecting efficient true value estimators, informing both the design of future research and investor decision-making.     ​​