Specialist Profits and the Minimum Price Increment
Jay F. Coughenour
University of Delaware - Department of Finance
University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable
April 30, 2004
NYSE specialist participation rates and profits are affected by the rules that govern their trades. Lowering the minimum tick from $1/16 to $0.01 effectively relaxed the public order precedence rule, gave specialists more price points within the bid-ask spread on which to quote aggressively, and lowered spreads. Due to these offsetting forces, we find that average specialist gross trading profits were not significantly altered, but their participation increased. Cross-sectional analyses reveal that participation rates and high-frequency trading profits increased more for specialists handling stocks where the cost and opportunity of obtaining order precedence were relatively expensive and scarce prior to the tick change.
Number of Pages in PDF File: 46
Keywords: NYSE Specialists, Decimalization, Trading Profits, Spectral Analysis
JEL Classification: C22, G18, G20
Date posted: April 30, 2004
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