Abstract
This paper examines how a reduction in the minimum tick size affects the behaviour of pseudo market-makers and market quality. Consistent with prior findings, this study documents that bid-ask spreads and depth decline after a minimum tick size reduction; and the magnitude of tick size reduction influence the extent of the decrease. Empirical evidence from this research indicates that pseudo market-makers prefer lower-price stocks post-reduction, as the yield from quoting these spreads are higher. This is accompanied by a corresponding shift in trading activities, away from higher priced securities. Trading costs, measured using simulated market impact, decrease for large trades in the top price tier but increase otherwise.
Original language | English |
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Pages (from-to) | 88-100 |
Number of pages | 13 |
Journal | International Review of Economics and Finance |
Volume | 47 |
DOIs | |
Publication status | Published - 1 Jan 2017 |
Keywords
- Bid-ask spreads
- Market makers
- Market quality
- Minimum tick