Reg NMS and Minimum-Tick Distort the Market in Opposing Directions: Theory and Market Experimental Evidence

47 Pages Posted: 9 Nov 2018 Last revised: 16 Jun 2019

See all articles by Yiping Lin

Yiping Lin

Capital Markets CRC Limited (CMCRC)

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Vito Mollica

Macquarie Graduate School of Management; Capital Markets CRC Limited (CMCRC); Macquarie University, Macquarie Business School

Multiple version iconThere are 2 versions of this paper

Date Written: November 8, 2018

Abstract

We investigate the SEC Tick Size Pilot which mandated a 400% increase in minimum tick from 1 to 5 cents for small stocks. We predict and show that an increase in the minimum tick promotes venues operating inverted fee structures while Reg NMS promotes venues operating maker-taker fee structures. This is because the Reg NMS directs orders to the venue with the lowest displayed quotes – maker-taker venues with the highest make rebate to limit orders irrespective of take fees. By contrast, the minimum tick enforces uniformity in displayed quotes and thus directs orders to the inverted venue with the highest market order rebate. Both regulatory mechanisms are highly distortionary and cause the equivalent of water to flow uphill – the rise in the minimum tick results in a 60% relatively higher cost increase in inverted venues but, despite this, trading shifts from maker-taker to inverted venues.

Keywords: Information Content, Information Asymmetry, Tick Size, Exchange Access Fee, Reg NMS Rules.

JEL Classification: G12, G14

Suggested Citation

Lin, Yiping and Swan, Peter Lawrence and Mollica, Vito, Reg NMS and Minimum-Tick Distort the Market in Opposing Directions: Theory and Market Experimental Evidence (November 8, 2018). Macquarie University Faculty of Business & Economics Research Paper. Available at SSRN: https://ssrn.com/abstract=3281477 or http://dx.doi.org/10.2139/ssrn.3281477

Yiping Lin (Contact Author)

Capital Markets CRC Limited (CMCRC) ( email )

Level 2, 55 Harrington Street, The Rocks
Sydney, 2000
Australia

Peter Lawrence Swan

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Vito Mollica

Macquarie Graduate School of Management ( email )

Capital Markets CRC Limited (CMCRC) ( email )

Level 3, 55 Harrington Street
Sydney, 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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