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Market Microstructure of the Pink Sheets

47 Pages Posted: 20 Feb 2007 Last revised: 17 Nov 2012

William G. Christie

Vanderbilt University - Finance; Vanderbilt University - Law School

Nicolas P. B. Bollen

Vanderbilt University - Finance

Date Written: July 17, 2007

Abstract

We study the microstructure of the Pink Sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market. Clustering patterns in quotes, quoted spreads, and trade prices indicate that market participants have endogenously selected price-dependent tick sizes for different stocks. Clustering intensity varies across stocks as a function of proxies for information availability. Similarly, the bid-ask spread varies as a function of volatility and liquidity. We design a tick size schedule for the Pink Sheets that conforms to the clustering present in quotes, and track measures of market quality after the market adopted the schedule in 2006. No evidence of deterioration is found, suggesting that the market's endogenously selected tick sizes are robust.

Keywords: tick size, Pink Sheets market

Suggested Citation

Christie, William G. and Bollen, Nicolas P. B., Market Microstructure of the Pink Sheets (July 17, 2007). Available at SSRN: https://ssrn.com/abstract=963460 or http://dx.doi.org/10.2139/ssrn.963460

Wiliam G. Christie (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Owen Graduate School of Management
Nashville, TN 37203
United States
615-343-7802 (Phone)
615-343-7177 (Fax)

Vanderbilt University - Law School

131 21st Avenue South
Nashville, TN 37203-1181
United States

Nicolas P.B. Bollen

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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