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Tick Size Regulation and Sub-Penny Trading

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  • Sabrina Buti
  • Barbara Rindi
  • Yuanji Wen
  • Ingrid M. Werner
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    Abstract

    We show that following a tick size reduction in a decimal public limit order book (PLB) market quality and welfare fall for illiquid but increase for liquid stocks. If a Sub-Penny Venue (SPV) starts competing with a penny-quoting PLB, market quality deteriorates for illiquid, low priced stocks, while it improves for liquid, high priced stocks. As all traders can demand liquidity on the SPV, traders' welfare increases. If the PLB facing competition from a SPV lowers its tick size, PLB spread and depth decline and total volume and welfare increase irrespective of stock liquidity.

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    Bibliographic Info

    Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 492.

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    Date of creation: 2013
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    Handle: RePEc:igi:igierp:492

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