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Tick Size Regulation and Sub-Penny Trading

67 Pages Posted: 15 Sep 2013  

Sabrina Buti

Université Paris Dauphine - Department of Finance

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Yuanji Wen

University of Western Australia - Department of Accounting and Finance

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Date Written: September 10, 2013

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.

Keywords: Tick Size, Sub-Penny Trading, Limit Order Books, Dark Pools, Internalized Trades

JEL Classification: G10, G12, G20, G23, G24

Suggested Citation

Buti, Sabrina and Rindi, Barbara and Wen, Yuanji and Werner, Ingrid M., Tick Size Regulation and Sub-Penny Trading (September 10, 2013). Charles A. Dice Center Working Paper No. 2013-14; Fisher College of Business Working Paper No. 2013-03-14; Rotman School of Management Working Paper No. 2324862. Available at SSRN: https://ssrn.com/abstract=2324862 or http://dx.doi.org/10.2139/ssrn.2324862

Sabrina Buti

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Yuanji Wen

University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

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