The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks

Oppenheimer, Henry R.; Sabherwal, Sanjiv

doi:10.1016/s0378-4266(03)00107-9

Cited by 12 publications

(24 citation statements)

References 10 publications

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“…These results are consistent with the empirical …ndings by Oppenheimer et al (2003) who analyze the impact of US decimalization on the Canadian stocks and …nd that spread and inside depth decline by a greater amount in the US than in Canada. Similarly, Lin et al (2009) look at the e¤ect of US decimalization on stocks cross-listed on Euronext and NYSE and …nd that the NYSE proportion of trading of French …rms declines markedly in the post-decimalization period.…”

Section: Dual-market Model: Intermarket Competitionsupporting

confidence: 91%

Tick Size Regulation, Intermarket Competition and Sub-Penny Trading

2011

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The minimum price variation, or tick size, is at the center of the current regulatory debate as it a¤ects competition for liquidity provision in limit order books. A reduction in the tick size is …rstly shown to have a detrimental e¤ect on the quality of illiquid stocks as it worsens both spread and depth; but it bene…ts liquid stocks as it reduces inside spread and increases market depth. Then we build a dual-market model and examine how competition between two public limit order books (PLB) ends up with liquidity concentration on the market with a smaller tick size. By introducing di¤erent trader type, we adapt this dual-market framework into a model with a PLB competing with another book characterized by a smaller tick size, namely Internalization Pool (IP). In this way we are able to investigate the issue of sub-penny trading that is discussed in the SEC concept release on Equity Market Structure (2010). Our …ndings are as follows: for illiquid low priced stocks, the quality of a PLB is dramatically worsened when broker-dealers are able to use an internalization pool (IP) to provide price improvement by a fraction of the tick size; for liquid stocks however, the introduction of an IP fosters competition and improves both spread and depth. In addition our model predicts that broker-dealers use IP more intensively for low priced liquid stocks. AbstractThe minimum price variation, or tick size, is at the center of the current regulatory debate as it a¤ects competition for liquidity provision in limit order books. A reduction in the tick size is …rstly shown to have a detrimental e¤ect on the quality of illiquid stocks as it worsens both spread and depth; but it bene…ts liquid stocks as it reduces inside spread and increases market depth. Then we build a dual-market model and examine how competition between two public limit order books (PLB) ends up with liquidity concentration on the market with a smaller tick size. By introducing di¤erent trader type, we adapt this dualmarket framework into a model with a PLB competing with another book characterized by a smaller tick size, namely Internalization Pool (IP). In this way we are able to investigate the issue of sub-penny trading that is discussed in the SEC concept release on Equity Market Structure (2010). Our …ndings are as follows: for illiquid low priced stocks, the quality of a PLB is dramatically worsened when broker-dealers are able to use an internalization pool (IP) to provide price improvement by a fraction of the tick size; for liquid stocks however, the introduction of an IP fosters competition and improves both spread and depth. In addition our model predicts that broker-dealers use IP more intensively for low priced liquid stocks.

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Section: Dual-market Model: Intermarket Competitionsupporting

confidence: 91%

Tick Size Regulation, Intermarket Competition and Sub-Penny Trading

2011

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“…In relation to the latter, Lin et al (2009) show that if an exchange facing competition from a another exchange reduces its tick size then institutional order flow may potentially migrate to the competing exchange. Oppenheimer and Sabherwal (2003) and Chakravarty et al (2005) report that retail traders appear to be trading more frequently with a smaller tick size.…”

Section: Effect Of Tick Size Changes On Institutional Versus Retail Tmentioning

confidence: 99%

“…3. A third set of studies relies on assets that are cross-listed, that is assets that are trading on more than one exchange where the change affects trading in only one of the exchanges (see Lin et al 2009;Oppenheimer and Sabherwal 2003). This is also related to a more recent set of studies concerned with the association of the minimum tick size regulations and the incidence of HFT, in addition to the interaction of market systems (see Bartlett and McCrary 2013;Mahmoodzadeh and Gençay 2014;O'Hara et al 2014).…”

Section: An Outline Of the Surveyed Papersmentioning

confidence: 99%

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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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“…Oppenheimer and Sabherwal (2003) examine the impact of the U.S. decimalization on the trading of cross-listed Canadian stocks. The bid-ask spread declined and U.S. trading increased after the change, but not at the expense of the TSX volume.…”

Section: Competition Between the Us And Canadamentioning

confidence: 99%

Competition and Survival of Stock Exchanges: Lessons from Canada

Carpentier

L’Her²,

Suret

2008

Rev. Pac. Basin Finan. Mark. Pol.

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We analyze the competition between two developed stock exchanges. Their development rests mainly on their capacity to attract securities and trades. The US market is attracting a growing number of Canadian companies and is capturing a growing portion of their traded value. This slide of trading toward the US market is a huge challenge for Canadian policy makers while the efforts to compete with the US market seem to be having only limited effects. We analyze the implications of this situation for policy makers in Asia-Pacific where several markets and financial centers are attempting to emerge.

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The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks

Cited by 12 publications

References 10 publications

Tick Size Regulation, Intermarket Competition and Sub-Penny Trading

Tick Size Regulation, Intermarket Competition and Sub-Penny Trading

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

Competition and Survival of Stock Exchanges: Lessons from Canada

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