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Tick Size, Order Handling Rules, and Trading Costs

Kee H. Chung
SUNY at Buffalo - School of Management

Chairat Chuwonganant
Indiana University Purdue University Fort Wayne

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.

JEL Classifications: G14

Working Paper Series

Date posted: April 09, 2003 ; Last revised: April 09, 2003

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat, Tick Size, Order Handling Rules, and Trading Costs. Available at SSRN: http://ssrn.com/abstract=385944 or doi:10.2139/ssrn.385944

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Contact Information

Kee H. Chung (Contact Author) SUNY at Buffalo - School of Management ( email ) Buffalo, NY 14260 United States 716-645-3262 (Phone) 716-645-3823 (Fax) HOME PAGE: http://mgt.buffalo.edu/home/faculty/academic/finance/faculty/keechung
Chairat Chuwonganant Indiana University Purdue University Fort Wayne 2101 E. Coliseum Blvd. Fort Wayne, IN 46805 United States