Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange

Bacidore, Jeffrey M.; Battalio, Robert H.; Jennings, Robert H.

doi:10.1016/s1386-4181(03)00003-x

Cited by 92 publications

(66 citation statements)

References 14 publications

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“…Here as well, the regression coefficients in the right-most column show no statistically significant difference between the sample and control stocks, leading us to conclude that these measures of transaction costs also do not seem to be related to the relative tick size. This result is consistent with Bacidore, Battalio, and Jennings (2003) and Bessembinder (2003) who found that percentage effective spreads did not significantly change for NYSE stocks (in the former) or Nasdaq stocks (in the latter) following decimilazation.…”

supporting

confidence: 91%

“…Harris (1994,1996,1997) There is also extensive empirical research examining various market structure changes (both in the U.S. and in global markets) such as reducing tick sizes from eighths to sixteenths to decimals (see, for example, Ahn, Cao, and Cho (1996), Bacidore (1997), Goldstein and Kavajecz (2000), Jones and Lipson (2001), Ronen and Weaver (2001), Bacidore, Battalio, and 10 Such an outcome is consistent with results of Bartlett and McCrary (2013) and Kwan, Masulis, and Mclnish (2013). Jennings (2003), Bessembinder (2003), Chakravarty, Panchapagesan, and Wood (2005), and Bollen and Busse (2006)). Other papers looked at changes in the relative tick size around stock splits (e.g., Angel (1997), Schultz (2000).…”

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confidence: 99%

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Relative Tick Size and the Trading Environment

2014

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Recent proposals to raise the tick size on small stocks bring attention to the role played by market structure in shaping the trading environment and ultimately in capital formation. In this paper, we look at the how the relative tick size influences liquidity and the biodiversity of trader interactions in the market. Using unique order-level Our empirical analysis of relative tick size effects focuses on one such fundamental structure issue, and in this concluding section we discuss the implications of our results for the current debate regarding raising minimum tick sizes for small firms.Advocates of raising the tick size stress the linkage from tick size to market maker profits. Two avenues are suggested for how these profits would then drive additional investor trading. First, more profitable market making could lead to an increase in liquidity provision for the stocks, which would attract additional volume from investors who are wi!ling to trade liquid stocks but shy away from illiquid ones. Second, the higher profitability of market making operations at sell-side firms could lead to nrc>e>T<>r coverage, enhanced promotion by and increased willingness of companies to go public. In particular, the argument is that the fall in tick sizes to decimals has both reduced incentives to post limit orders and dramaticaUy reduced compensation to market making in those stocks. The resulting illiquidity has made such stocks unattractive to investors and, combined with the fall in analyst coverage of small firms, also made listing new stocks unattractive to issuers. Raising the minimum tick size addresses these concerns by improving the trading environment for small stocks.Our analysis essentially follows the first linkage above (tick size to liquidity to volume) by looking at the trading environment for stocks with different relative tick sizes. In our analysis, stocks in our Gl sample face relative tick si:zes that are approximately 10 times larger than those of the control stocks, G2 face relative tick sizes that are 4 times larger, and G3 stocks face relative ticks that are 2 times larger. Because our Maureen O'Hara (mo19@cornell.edu) and Gideon Saar (gs25@cornell.edu) are from the Johnson Graduate School of Management, Cornell University, and Zhuo Zhong (zz225@cornell.edu) is from the Department of Economics, Cornell University. We thank Viral Acharya, Simon Gervais, Charles Jones, and Andrew Lofor helpful comments on a presentation of this project at FINRA's Economic Advisory Committee meeting. NYSE provided us with data and financial support for analyzing the data. All conclusions are those of the authors and do not represent the views of the NYSE. 1 analysis controls for other factors that also affect liquidity (e.g., market capitalization, industry, investor clientele, and volatility), we can extract the effects of tick size on liquidity and the liquidity provision process. Does a larger relative tick size increase liquidity? We find little evidence of this. Percentage spreads are not significantly di...

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Relative Tick Size and the Trading Environment

2014

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“…Bacidore et al (2003) argue that a smaller tick leads to less displayed liquidity on the order book, but that that has no effect on execution quality. Goldstein et al (2010) show that Acronyms are defined in Table 1 One size fits all?…”

Section: Tick Size Changes and Volatilitymentioning

confidence: 92%

One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations

Verousis

Perotti

Sermpinis

2017

Rev Quant Finan Acc

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This paper offers a systematic review of the empirical literature on the implications of tick size changes for exchanges. Our focus is twofold: first, we are concerned with the market quality implications of a change in the minimum tick size. Second, we are interested in the implications of changes in the minimum tick size on market structure. We show that there is a large body of empirical literature that documents a decrease in transaction costs following a decrease in the minimum tick size. However, even though market liquidity increases, the incentive to provide market making activities decreases. We document a strong link between the minimum tick size regulations and the recent increase in high frequency trading activity. A smaller tick enhances the price discovery process. However, the question of how multiple tick size regimes affect market liquidity in a fragmented market remains to be answered. Finally, we identify topics for future research; we discuss the empirical literature on the minimum trade unit and the recent calls for a minimum resting time for quotes.

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“…For example, Porter and Weaver (1997), Ahn, Cao, and Choc (1998), Bacidore, Battalio, and Jennings (2003), Bessembinder (2003), and Chakravmy, Wood, and Van Ness (2004).…”

Section: Notesmentioning

confidence: 99%

Tick Size Reduction and the Components of the Bid-Ask Spread on the Taiwan Stock Exchange

Kuo¹

2016

IJFR

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We examined the effect of reduced tick size on spread and its various components on Taiwan Stock Exchange (TWSE). The TWSE stands for a representative order-driving call mechanism in the emerging market. The noticeable market features of the TWSE render our findings on the effect of tick-size changes useful in combination with those reported in studies on developed markets. Our evidence strongly indicated that the traded spread and the order-processing component declined after tick size was reduced, whereas the asymmetric information component exhibited less significant changes. We documented a relatively high proportion of the order-processing component of the TWSE compared with that observed in developed markets after tick size was reduced. The cross-sectional regression analysis results indicated that stocks with high binding constraints, a high price, and high trading activity generated substantial savings on the order-processing component after tick-size conversion. Our empirical results highlight the important contributions of reduced tick size on market efficiency specifically in an emerging call market setting.

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Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange

Cited by 92 publications

References 14 publications

Relative Tick Size and the Trading Environment

Relative Tick Size and the Trading Environment

One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations

Tick Size Reduction and the Components of the Bid-Ask Spread on the Taiwan Stock Exchange

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