Minimum Price Variations, Time Priority, and Quote Dynamics
This 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 competitors' offers and (b) the dynamics of the best price in the market to the state of the book.
(This abstract was borrowed from another version of this item.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Domowitz, Ian, 1993.
"A taxonomy of automated trade execution systems,"
Journal of International Money and Finance,
Elsevier, vol. 12(6), pages 607-631, December.
- Ian Domowitz, 1992. "A Taxonomy of Automated Trade Execution Systems," IMF Working Papers 92/76, International Monetary Fund.
- Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-276, March.
- Bacidore, Jeffrey M., 1997. "The Impact of Decimalization on Market Quality: An Empirical Investigation of the Toronto Stock Exchange," Journal of Financial Intermediation, Elsevier, vol. 6(2), pages 92-120, April.
- Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, vol. 50(5), pages 1655-1689, December.
- Chordia, Tarun & Subrahmanyam, Avanidhar, 1995. "Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence," The Journal of Business, University of Chicago Press, vol. 68(4), pages 543-575, October.
- Anshuman, V Ravi & Kalay, Avner, 1998. "Market Making with Discrete Prices," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 81-109.
- Angel, James J, 1997. " Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-681, June.
- Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
- Maskin, Eric & Tirole, Jean, 1988. "A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles," Econometrica, Econometric Society, vol. 56(3), pages 571-599, May.
- Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
- Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
- Bernhardt, Dan & Hughson, Eric, 1996. "Discrete Pricing and the Design of Dealership Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 148-182, October.
- Ahn, Hee-Joon & Cao, Charles Q. & Choe, Hyuk, 1996. "Tick Size, Spread, and Volume," Journal of Financial Intermediation, Elsevier, vol. 5(1), pages 2-22, January. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:eee:jfinin:v:8:y:1999:i:3:p:141-173. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.