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Tick Size, Order Handling Rules, and Trading Costs

Author

Listed:
  • Kee H. Chung
  • Chairat Chuwonganant

Abstract

We show that the effect of the tick-size change on NASDAQ spreads depends critically on the Order Handling Rules (OHR). Our empirical results show that the tick-size reduction has no impact on the spread of NASDAQ issues that were not subject to the new OHR, but has a significant effect on the spread of NASDAQ issues that were subject to the OHR. These results indicate that smaller tick sizes are valuable in reducing market friction only if market makers compete on price with public traders. Our results are in line with the finding of prior studies that execution costs are lower in auction markets than in pure dealer markets.

Suggested Citation

  • Kee H. Chung & Chairat Chuwonganant, 2004. "Tick Size, Order Handling Rules, and Trading Costs," Financial Management, Financial Management Association, vol. 33(1), Spring.
    • Handle: RePEc:fma:fmanag:chungchuwonganant03
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    Cited by:

    1. Huang, Roger D. & Ting, Christopher, 2008. "A functional approach to the price impact of stock trades and the implied true price," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 1-16, January.
    2. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    3. Hu, Shing-yang, 2006. "A simple estimate of noise and its determinant in a call auction market," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 348-362.
    4. Jieun Lee, 2023. "Dollar and government bond liquidity: evidence from Korea," BIS Working Papers 1145, Bank for International Settlements.
    5. Garvey, Ryan & Wu, Fei, 2011. "Information, speed vs. cost trade-offs, and order routing decisions in U.S. equity markets," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 408-422, June.
    6. Gajewski, Jean-Francois & Gresse, Carole, 2007. "Centralised order books versus hybrid order books: A paired comparison of trading costs on NSC (Euronext Paris) and SETS (London Stock Exchange)," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2906-2924, September.
    7. Chih-Hsiang Chang & Wen-Shan Chiang, 2014. "Conditioned Responses towards Measures Relating to the Capital Cost of Short Sellers: Evidence from Taiwan," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-27.

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