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Specialist Profits and the Minimum Price Increment

46 Pages Posted: 30 Apr 2004  

Jay F. Coughenour

University of Delaware - Department of Finance

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Interactive Brokers, Inc. (IBKR); University of Pennsylvania - Financial Economists Roundtable

Date Written: April 30, 2004

Abstract

NYSE specialist participation rates and profits are affected by the rules that govern their trades. Lowering the minimum tick from $1/16 to $0.01 effectively relaxed the public order precedence rule, gave specialists more price points within the bid-ask spread on which to quote aggressively, and lowered spreads. Due to these offsetting forces, we find that average specialist gross trading profits were not significantly altered, but their participation increased. Cross-sectional analyses reveal that participation rates and high-frequency trading profits increased more for specialists handling stocks where the cost and opportunity of obtaining order precedence were relatively expensive and scarce prior to the tick change.

Keywords: NYSE Specialists, Decimalization, Trading Profits, Spectral Analysis

JEL Classification: C22, G18, G20

Suggested Citation

Coughenour, Jay F. and Harris, Lawrence, Specialist Profits and the Minimum Price Increment (April 30, 2004). Available at SSRN: https://ssrn.com/abstract=537785 or http://dx.doi.org/10.2139/ssrn.537785

Jay F. Coughenour (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States
(302) 831-1015 (Phone)

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
P.O. Box 1540
Valley Stream, NY 11582
United States

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
10th Floor
Chicago, IL 60604
United States

University of Pennsylvania - Financial Economists Roundtable ( email )

Philadelphia, PA
United States

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