The bid-ask bounce is the bouncing of trade prices between the bid and ask sides of the market. It introduces a systematic bias to the data which can cause serious problems in analysis.
What methods can be used to control for the bid/ask bounce when using high-frequency data? One approach is to use the bid/ask midpoint, but what about with trade data? Even using n-minutely VWAP prices doesn't guarantee that you won't have spurious mean-reverting behavior.
Answer
Why not just use the weighted mid-market price, quoted as (Bsize * Aprc + Asize * Bprc) / (Asize + Bsize)? This measure doesn't suffer a bounce per se and allows you to directly take moving or exponential moving averages.
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