Tick size, price grids and market performance: Stable matches as a model of market dynamics and equilibrium
- Creators
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Plott, Charles
- Roll, Richard
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Seo, Han
- Zhao, Hao
Abstract
The tick size in a financial market is the minimum allowable difference between ask and bid prices. By the rules of each exchange, no transactions can occur within the tick interval. The impact of tick size is an ongoing controversy which we study by experimental methods, whose simplicity helps distinguish among competing models of complex real-world securities markets. We observe patterns predicted by a matching (cooperative game) model. Because a price grid interferes with a competitive equilibrium and restrictions on order flow interfere with information aggregation, the matching model provides predictions when the competitive model cannot, although their predictions are the same when a competitive equilibrium does exist. Our experiments examine stable allocations, average prices, timing of order flow, information flow and price dynamics. Larger tick size invites more speculation, which in turn increases liquidity. However, increased speculation leads to inefficient trades that otherwise would not have occurred.
Additional Information
© 2019 Elsevier Inc. Received 11 February 2018, Available online 22 August 2019. The research support of the John Templeton Foundation (grant no 58067) and the Rising Tide Foundation (grant no RTF-19-500) is gratefully acknowledged. The authors thank Travis Maron and Hsing Yang Lee of the Caltech Laboratory for Experimental Economics and Political Science, for their assistance and advice. We thank Anmol Ratan and Jun Chen for their many helpful comments.Attached Files
Supplemental Material - 1-s2.0-S0899825619301150-mmc1.pdf
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Additional details
- Eprint ID
- 98101
- DOI
- 10.1016/j.geb.2019.08.004
- Resolver ID
- CaltechAUTHORS:20190822-092831429
- John Templeton Foundation
- 58067
- Rising Tide Foundation
- RTF-19-500
- Created
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2019-08-22Created from EPrint's datestamp field
- Updated
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2021-11-16Created from EPrint's last_modified field