Tick Size, Price Grids and Market Performance: Stable Matches as a Model of Market Dynamics and Equilibrium

60 Pages Posted: 23 Feb 2018

See all articles by Charles R. Plott

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Richard Roll

California Institute of Technology

Han Seo

California Institute of Technology

Hao Zhao

Chapman University

Date Written: February 9, 2018

Abstract

This paper reports experiments motivated by ongoing controversies regarding tick size in markets. The minimum tick size in a market dictates discrete values at which bids and asks can be tendered by market participants. All transaction prices must occur at these discrete values, which are established by the rules of each exchange. The simplicity of experiments helps to distinguish among competing models of complex real-world securities markets. We observe patterns predicted by a matching (cooperative game) model. Because a price grid damages the equilibrium of the competitive model, the matching model provides predictions where the competitive model cannot. Their predictions are the same when a competitive equilibrium exists. The experiment examines stable allocations, average prices, timing of order flow and price dynamics. Larger tick size invites more speculation, which in turn increases liquidity. However, increased speculation leads to inefficient trades that otherwise would not have occurred.

Keywords: price tick-size, liquidity, matching, non-existence, information, convergence

JEL Classification: D01, D03, D40, D46, D80, G14, G02, G28

Suggested Citation

Plott, Charles R. and Roll, Richard W. and Seo, Han and Zhao, Hao, Tick Size, Price Grids and Market Performance: Stable Matches as a Model of Market Dynamics and Equilibrium (February 9, 2018). Available at SSRN: https://ssrn.com/abstract=3122558 or http://dx.doi.org/10.2139/ssrn.3122558

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

Richard W. Roll

California Institute of Technology ( email )

1200 East California Blvd
Mail Code: 228-77
Pasadena, CA 91125
United States
626-395-3890 (Phone)
310-836-3532 (Fax)

Han Seo

California Institute of Technology ( email )

Pasadena, CA 91125
United States

Hao Zhao

Chapman University ( email )

One University Dr.
Orange, CA 92866
United States

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