Futures trading costs and market microstructure invariance: Identifying bet activity

Market microstructure invariance (MMI) stipulates that trading costs of financial assets are driven by the volume and volatility of bets, but these variables are inherently difficult to identify. With futures transactions data, we estimate bet volume as the trading volume of brokerage firms that trade on behalf of their clients and bet volatility as the trade-related component of futures volatility. We find that the futures bid-ask spread lines up with bet volume and bet volatility as predicted by MMI, and that intermediation by high-frequency traders does not interfere with the MMI relation.