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Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets

5 Pages Posted: 23 Jan 2017  

Yong Chao

University of Louisville - College of Business - Department of Economics

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: January 20, 2017

Abstract

Security trading now fragments into more than 10 almost identical stock exchanges in the United States. We show that discrete pricing is one economic force that prevents the consolidation of trading volume. The uniform one-cent tick size (minimum price variation), imposed by the SEC’s Rule 612, leads to more dispersed trading for lower priced securities. When a security reverse splits, its price increases and relative tick size (one cent divided by the price) decreases. We find that reverse splits consolidate trading of securities, using securities with identical underlying fundamentals that do not reverse split as the control group.

Keywords: Discrete Pricing, Market Fragmentation, Two-Sided Markets

JEL Classification: L11, L5, G10, G20

Suggested Citation

Chao, Yong and Yao, Chen and Ye, Mao, Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets (January 20, 2017). American Economic Review, Vol. 107, No. 5, 2017. Available at SSRN: https://ssrn.com/abstract=2902883

Yong Chao (Contact Author)

University of Louisville - College of Business - Department of Economics ( email )

Louisville, KY 40292
United States
(502)852-3573 (Phone)
(502)852-7672 (Fax)

HOME PAGE: http://yongchao.us

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

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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