How Best to Supply Liquidity to a Small-Capitalization Securities Market

Abstract:     
There is a worldwide search for better ways to supply liquidity for small-capitalization stocks. Although Nasdaq provides a liquid market for such stocks by giving broker-dealers financial incentives to generate order flow, recent allegations of dealer collusion have led to calls for reform. It is possible to design a fair, transparent computerized market that also creates incentives for broker-dealers to generate order flow by using secondary priority rules other than time. A nontrivial relative tick size is also important for providing liquidity by enforcing priority rules.

JEL Classification: G10, G18

working papers series