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Tick Size Regulation and Sub-Penny Trading

  • Buti, Sabrina

    (University of Toronto)

  • Rindi, Barbara

    (Bocconi University)

  • Wen, Yuanji

    (Bocconi University)

  • Werner, Ingrid M.

    (OH State University)

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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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2013-14.

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Date of creation: Sep 2013
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Handle: RePEc:ecl:ohidic:2013-14
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Web page: http://www.cob.ohio-state.edu/fin/dice/list.htm
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