Minimum Price Variations, Time Priority and Quotes Dynamics
Finance and Banking Discussion Papers Series 19
Posted: 27 Nov 1996
Date Written: 1999
We analyze price competition between dealers in a security market where the bidding process is sequential. The model provides an interpretation for the evolution of the best ask and bid prices, in between transactions, in security markets. We find that convergence to the competitive ask and bid prices can take time. The speed of convergence is determined by the frequency with dealers check their offers and the tick size This creates a relationship between the expected trading cost and the timing of offers posted by the dealers. We also obtain that a zero minimum price variation never minimizes the expected trading cost. In fact the optimal tick size increases with the level of the monitoring cost borne by the dealers. Finally, we find that time priority prevents dealers form using bidding strategies sustaining an uncompetitive price for a long time.
JEL Classification: G19, D43
Suggested Citation: Suggested Citation