Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price
24 Pages Posted: 3 Dec 2005
Date Written: 2005
Abstract
In this study we analyze the effect of tick size on information-based trading. Although prior studies provide extensive evidence on the effect of tick size on market quality measures such as spreads, depths, and return volatility, there is little evidence as to the effect of tick size on the informational efficiency of asset price. Our results indicate that the probability of information-based trading during the post-decimal period is significantly greater than the corresponding figure during the pre-decimal period. We also show that the increase in information-based trading after decimalization cannot be attributed to concurrent changes in stock attributes. We interpret our findings as evidence that the smaller tick size under penny pricing encourages information-based trading and thereby raises the informational efficiency of asset price.
Keywords: tick size, information-based trading, decimalization, PIN measure, information efficiency
JEL Classification: G18, G19
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Order Preferencing and Market Quality on NASDAQ Before and after Decimalization
By Kee H. Chung, Chairat Chuwonganant, ...
-
Trading Costs and Quote Clustering on the NYSE and NASDAQ after Decimalization
By Kee H. Chung, Bonnie F. Van Ness, ...
-
Penny Pricing and the Components of Spread and Depth Changes
By Kee H. Chung, Charlie Charoenwong, ...
-
Bid-Ask Spreads in Multiple Dealer Settings: Some Experimental Evidence
By Lucy F. Ackert and Bryan K. Church
-
Does Internalization Diminish the Impact of Quote Aggressiveness on Dealer Market Share?
By Kee H. Chung, Chairat Chuwonganant, ...
-
The Dynamics of Dealer Markets and Trading Costs
By Kee H. Chung and Youngsoo Kim