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Tick Size Wars, High Frequency Trading, and Market Quality

Author

Listed:
  • Grimstvedt Meling, Tom

    (University of Bergen, Department of Economics)

  • Ødegård, Bernt Arne

    (University of Stavanger)

Abstract

We show that competitive stock exchanges undercut other exchanges’ tick sizes to gain market share, and that this tick size competition increases investors’ trading costs. Our empirical analysis is focused on an event in 2009 where three stock exchanges, Chi-X, Turquoise, BATS Europe, reduced their tick sizes for stocks with an Oslo Stock Exchange (OSE) primary listing. We find that the tick size-reducing exchanges captured market shares from the large-tick OSE. Trading costs at the OSE increased while trading costs in the competing exchanges remained unchanged. High frequency trading appears to be the main driver behind the market share and trading cost results. Our findings suggest that unregulated stock markets can produce tick sizes that are excessively small.

Suggested Citation

  • Grimstvedt Meling, Tom & Ødegård, Bernt Arne, 2017. "Tick Size Wars, High Frequency Trading, and Market Quality," Working Papers in Economics 5/17, University of Bergen, Department of Economics.
    • Handle: RePEc:hhs:bergec:2017_005
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    References listed on IDEAS

    as
    1. Robert P. Bartlett, III & Justin McCrary, 2015. "Dark Trading at the Midpoint: Pricing Rules, Order Flow, and High Frequency Liquidity Provision," NBER Working Papers 21286, National Bureau of Economic Research, Inc.
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    4. Cordella, Tito & Foucault, Thierry, 1999. "Minimum Price Variations, Time Priority, and Quote Dynamics," Journal of Financial Intermediation, Elsevier, vol. 8(3), pages 141-173, July.
    5. Kwan, Amy & Masulis, Ronald & McInish, Thomas H., 2015. "Trading rules, competition for order flow and market fragmentation," Journal of Financial Economics, Elsevier, vol. 115(2), pages 330-348.
    6. Bruno Biais & Christophe Bisière & Chester Spatt, 2010. "Imperfect Competition in Financial Markets: An Empirical Study of Island and Nasdaq," Management Science, INFORMS, vol. 56(12), pages 2237-2250, December.
    7. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    8. 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.
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    More about this item

    Keywords

    Equity Trading; Limit Order Markets; Tick Sizes; High Frequency Trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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