Tick Size, Order Handling Rules, and Trading Costs
Kee H. Chung
State University of New York at Buffalo - School of Management
Indiana University Purdue University Fort Wayne
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.
Number of Pages in PDF File: 26
JEL Classification: G14
Date posted: April 9, 2003