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Why Trading Speed Matters: A Tale of Queue Rationing under Price Controls

44 Pages Posted: 10 Aug 2014 Last revised: 13 Aug 2017

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Mao Ye

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Date Written: August 3, 2017

Abstract

We show that queueing rationing under price controls drives high-frequency trading. A one-cent uniform tick size (minimal price variation) creates rents and generates queues for liquidity provision, particularly for securities with lower prices (larger relative tick sizes). Speed rations the rents to high-frequency traders (HFTs) through their time priority in the queue; non-HFTs demand liquidity despite increased liquidity provision revenue. Difference-in-differences tests using exchange-traded fund splits/reverse splits show that an increase in relative tick size increases the fraction of liquidity provided by HFTs but harms liquidity. These results challenge the proposal to increase the tick size to five cents.

Keywords: High-Frequency Trading, Liquidity, Tick Size, Price Controls, Queue Rationing

JEL Classification: G10, G14, G18

Suggested Citation

Yao, Chen and Ye, Mao, Why Trading Speed Matters: A Tale of Queue Rationing under Price Controls (August 3, 2017). Available at SSRN: https://ssrn.com/abstract=2478216

Chen Yao

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
Shatin, N.T.
Hong Kong
852 39433215 (Phone)

HOME PAGE: http://sites.google.com/site/chenyaosite/research

Mao Ye (Contact Author)

University of Illinois at Urbana-Champaign ( email )

406 Wohlers
1206 South 6th Street
Champaign, IL 61820
United States
2172440474 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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