Tick Size Regulation and Sub-Penny Trading

Sabrina Buti, Barbara Rindi (), Yuanji Wen and Ingrid M. Werner

No 492, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: 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.

Date: 2013
New Economics Papers: this item is included in nep-com, nep-lam, nep-ltv, nep-mst and nep-neu
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