Article1996

Does a Large Minimum Price Variation Encourage Order Exposure

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Financial Markets and Investment Strategies Stochastic processes and financial applications Securities Regulation and Market Practices

Abstract

Does a Large Minimum Price Variation Encourage Order Exposure? The minimum price variation (tick) affects order exposure. Traders who display their orders risk being front-run. In markets that enforce time precedence, the tick makes front-running expensive. It sets the price of obtaining order precedence through price priority when another trader has time precedence. This paper examines order, quotation, and transaction data from the Paris Bourse and the Toronto Stock Exchange to characterize the relation between tick size and order exposure. The results show that traders display more size when the tick is large and when intraday volatility is small. The topic is particularly timely given recent regulatory interest in reducing tick sizes.

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References

1987Price, trade size, and information in securities markets 1983Information Effects on the Bid-Ask Spread 1988Estimating the components of the bid/ask spread 1995An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse 1993Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis 1994Minimum Price Variations, Discrete Bid–Ask Spreads, and Quotation Sizes 1991Stock Price Clustering and Discreteness 1997Liquidity Provision with Limit Orders and a Strategic Specialist

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1998Decimalization and competition among stock markets: Evidence from the Toronto Stock Exchange cross-listed securities 1997Tick Size and Market Quality 2007Hide-and-Seek in the Market: Placing and Detecting Hidden Orders 2003Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange 2001The use of undisclosed limit orders on the Australian Stock Exchange 2013

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