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