This paper develops a real-time structural model of price formation, and uses it to investigate the dynamics of effective quotes and bid-ask spreads between consecutive trades. There is some evidence that the effective bid-ask spreads increase over time when no orders arrive. The effective...

A standard assumption of market microstructure models is that traders process the information content of past trading activities instantly. In a more realistic setting, they need time to do so and market makers are aware of that. Therefore, clustering trades with shorter duration (waiting time...