Sub-Penny and Queue-Jumping
Charles A. Dice Center Working Paper No. 2013-18
53 Pages Posted: 6 Nov 2013 Last revised: 6 Aug 2015
Date Written: July 1, 2015
We develop a model where a public limit order book (PLB) competes with a Sub-Penny Venue, which allows Sub-Penny Trading (SPT). SPT occurs when a trader undercuts orders in the PLB by less than one penny, a practice we call queue-jumping (QJ). QJ is higher for NASDAQ than for NYSE stocks. We confirm the model's predictions that QJ increases in liquidity and in the tick-to-price ratio. We also find that QJ is associated with improved PLB market quality, especially for large capitalization stocks. Finally, we show that High Frequency Trading is negatively related to QJ.
Keywords: Sub-penny trading, fragmentation, dark pools, market quality, price discovery, market efficiency, SEC, microstructure
JEL Classification: G10, G12, G14, G18, G20
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