Tick Size, Order Handling Rules, and Trading Costs

26 Pages Posted: 9 Apr 2003  

Kee H. Chung

State University of New York at Buffalo - School of Management

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

Multiple version iconThere are 3 versions of this paper

Abstract

We show that the effect of the tick-size change on NASDAQ spreads depends critically on the Order Handling Rules (OHR). Our empirical results show that the tick-size reduction has no impact on the spread of NASDAQ issues that were not subject to the new OHR, but has a significant effect on the spread of NASDAQ issues that were subject to the OHR. These results indicate that smaller tick sizes are valuable in reducing market friction only if market makers compete on price with public traders. Our results are in line with the finding of prior studies that execution costs are lower in auction markets than in pure dealer markets.

JEL Classification: G14

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat, Tick Size, Order Handling Rules, and Trading Costs. Available at SSRN: https://ssrn.com/abstract=385944 or http://dx.doi.org/10.2139/ssrn.385944

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

2101 E. Coliseum Blvd.
Fort Wayne, IN 46805
United States

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