Tick Size, Order Handling Rules, and Trading Costs
16 Pages Posted: 7 Jan 2005
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Tick Size, Order Handling Rules, and Trading Costs
Tick Size, Order Handling Rules, and Trading Costs
Tick Size, Order Handling Rules, and Trading Costs
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.
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