Pseudo market-makers, market quality and the minimum tick size

Andrew Lepone*, Jin Boon Wong

*Corresponding author for this work

Research output: Contribution to journalArticle

5 Citations (Scopus)

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 languageEnglish
Pages (from-to)88-100
Number of pages13
JournalInternational Review of Economics and Finance
Volume47
DOIs
Publication statusPublished - 1 Jan 2017

Keywords

  • Bid-ask spreads
  • Market makers
  • Market quality
  • Minimum tick

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