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Minimum Price Variations, Time Priority, and Quote Dynamics

  • Cordella, Tito
  • Foucault, Thierry

We analyze price competition between dealers in a security market where the bidding process is sequential. The model provides an interpretation for the evolution of the best ask and bid prices, in between transactions. We find that convergence to the competitive ask and bid prices can take time. The speed of convergence is determined by the frequency with which dealers check their offers and by the tick size. This creates a relationship between the expected trading cost and the timing of offers posted by the dealers. We also find that a zero minimum price variation never minimizes the expected trading cost. Finally, we study the role of time priority. Journal of Economic Literature

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 8 (1999)
Issue (Month): 3 (July)
Pages: 141-173

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Handle: RePEc:eee:jfinin:v:8:y:1999:i:3:p:141-173
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  1. Easley, David, et al, 1996. " Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-36, September.
  2. Domowitz, Ian, 1993. "A taxonomy of automated trade execution systems," Journal of International Money and Finance, Elsevier, vol. 12(6), pages 607-631, December.
  3. 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 571-99, May.
  4. Kandel, Eugene & Marx, Leslie M., 1997. "Nasdaq market structure and spread patterns," Journal of Financial Economics, Elsevier, vol. 45(1), pages 61-89, July.
  5. Dutta, Prajit K & Madhavan, Ananth, 1997. " Competition and Collusion in Dealer Markets," Journal of Finance, American Finance Association, vol. 52(1), pages 245-76, March.
  6. 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.
  7. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  8. 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 1655-89, December.
  9. Angel, James J, 1997. " Tick Size, Share Prices, and Stock Splits," Journal of Finance, American Finance Association, vol. 52(2), pages 655-81, June.
  10. 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.
  11. 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 543-75, October.
  12. 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.
  13. 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.
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