Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence

JOURNAL OF BUSINESS, Vol 68 No 4, October 1995

Posted: 25 Aug 1998

See all articles by Tarun Chordia

Tarun Chordia

Emory University - Department of Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

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Abstract

This article analyzes the effects of a finite tick size and the practice of "payment-for-order flow" on market maker competition. Even if the NYSE reservation price is superior to its non-NYSE counterpart, brokers may, due to payment-for-order flow, prefer to execute orders off the NYSE floor. In accordance with the implications of the model, empirical analysis suggests that the non-NYSE market makers trade a larger fraction of the smaller order sizes and offer fewer price improvement opportunities; and large companies appear to have enhanced price improvement opportunities on the NYSE.

JEL Classification: G00

Suggested Citation

Chordia, Tarun and Subrahmanyam, Avanidhar, Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence. JOURNAL OF BUSINESS, Vol 68 No 4, October 1995. Available at SSRN: https://ssrn.com/abstract=6627

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

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