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The Effect of Tick Size on Price Clustering and Trading Volume

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  • Allaudeen Hameed
  • Eric Terry

Abstract

Proposals have been made for some stock exchanges to reduce the size of their trading tick in order to lower transactions costs and, as a result, attract more trading volume and firm listings. We investigate the impact of tick size on price clustering and trading volume when the minimum price change varies with price level. Controlling the firm specific variables, we find that a smaller trading tick tends to exacerbate price clustering. Furthermore, a reduction in tick size is more likely to increase trading volume if the shares are heavily traded. These results suggest that previous studies on other stock markets may have overstated the benefits of a smaller trading tick to traders.

Suggested Citation

  • Allaudeen Hameed & Eric Terry, 1998. "The Effect of Tick Size on Price Clustering and Trading Volume," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(7‐8), pages 849-867, September.
  • Handle: RePEc:bla:jbfnac:v:25:y:1998:i:7-8:p:849-867
    DOI: 10.1111/1468-5957.00216
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    File URL: https://doi.org/10.1111/1468-5957.00216
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    Cited by:

    1. Gunther Capelle-Blancard & Mo Chaudhury, 2007. "Price clustering in the CAC 40 index options market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1201-1210.

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