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Minimum Price Variations, Time Priority and Quote Dynamics

Author

Listed:
  • Thierry Foucault

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Tito Cordella

Abstract

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

Suggested Citation

  • Thierry Foucault & Tito Cordella, 1999. "Minimum Price Variations, Time Priority and Quote Dynamics," Post-Print hal-00459772, HAL.
    • Handle: RePEc:hal:journl:hal-00459772
    DOI: 10.1006/jfin.1999.0266
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    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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