Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price

24 Pages Posted: 3 Dec 2005

See all articles by Xin Zhao

Xin Zhao

Pennsylvania State University (Erie) - The Behrend College

Kee H. Chung

State University of New York at Buffalo - School of Management

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

Zhao, Xin Jessica and Chung, Kee H., Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price (2005). Available at SSRN: https://ssrn.com/abstract=861204 or http://dx.doi.org/10.2139/ssrn.861204

Xin Jessica Zhao (Contact Author)

Pennsylvania State University (Erie) - The Behrend College ( email )

286 Burke
Erie, PA 16563-1400
United States

Kee H. Chung

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html