Title

Tick Size, Order Handling Rules, and Trading Costs

Document Type

Article

Publication Date

Spring 2004

Publication Source

FM: Financial Management

Volume

33

Issue

1

Inclusive pages

47-62

Publisher

Wiley

ISBN/ISSN

00463892

Peer Reviewed

yes

Abstract

We show that the effect of the tick-size change on NASDAQ spreads depends critically on the Order Handling Rules (OHR). Our empirical results show that the tick-size reduction has no impact on the spread of NASDAQ issues that were not subject to the new OHR, but has a significant effect on the spread of NASDAQ issues that were subject to the OHR. These results indicate that smaller tick sizes are valuable in reducing market friction only if market makers compete on price with public traders. Our results are in line with the finding of prior studies that execution costs are lower in auction markets than in pure dealer markets.

Disciplines

Accounting

This document is currently not available here.

Share

COinS