Minimum Price Variations, Time Priority, and Quote Dynamics
AbstractThis paper analyses the impact of a minimum price variation (tick) and time priority on the quote dynamics and on trading costs when competition for the order flow is dynamic. It finds that convergence to competitive prices can take time and that the speed of convergence is influenced by the tick size, the priority rule and the characteristics of the order arrival process. It also shows that a zero minimum price variation is never optimal when competition for the order flow is dynamic. The paper compares the trading outcomes with and without time priority. It shows that, for reasonable parameterizations, time priority reduces trading costs because it prevents equilibria in which uncompetitive spreads can be sustained. Finally, the paper relates (a) the trading costs to the speed with which liquidity suppliers react to their competitorsâ offers and (b) the dynamics of the best price in the market to the state of the book.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Intermediation.
Volume (Year): 8 (1999)
Issue (Month): 3 (July)
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Web page: http://www.elsevier.com/locate/inca/622875
Other versions of this item:
- Cordella, Tito & Foucault, Thierry, 1997. "Minimum Price Variations, Time Priority and Quote Dynamics," CEPR Discussion Papers 1717, C.E.P.R. Discussion Papers.
- Tito Cordella & Thierry Foucault, 1996. "Minimum price variations, time priority and quotes dynamics," Economics Working Papers 182, Department of Economics and Business, Universitat Pompeu Fabra.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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