Two papers on minimum tick sizes as elements of market design:
University of Louisville - College of Business - Department of Economics
University of Warwick
University of Illinois at Urbana-Champaign
January 23, 2016
Abstract:
University of Warwick
University of Illinois at Urbana-Champaign
September 16, 2015
Abstract:
And here are links to video presentations by Mao Ye:
Yong Chao
University of Louisville - College of Business - Department of Economics
Chen Yao
University of Warwick
Mao Ye
University of Illinois at Urbana-Champaign
January 23, 2016
Abstract:
We propose a theoretical model to explain two salient features of the U.S. stock exchange industry: (i) sizable dispersion and frequent changes in stock exchange fees; and (ii) the proliferation of stock exchanges offering identical transaction services, highlighting the role of discrete pricing. Exchange operators in the United States compete for order flow by setting “make” fees for limit orders (“makers”) and “take” fees for market orders (“takers”). When traders can quote continuous prices, the manner in which operators divide the total fee between makers and takers is irrelevant because traders can choose prices that perfectly counteract any fee division. If such is the case, order flow consolidates on the exchange with the lowest total fee. The one-cent minimum tick size imposed by the U.S. Securities and Exchange Commission’s Rule 612(c) of Regulation National Market Systems for traders prevents perfect neutralization and eliminates mutually agreeable trades at price levels within a tick. These frictions (i) create both scope and incentive for an operator to establish multiple exchanges that differ in fee structure in order to engage in second-degree price discrimination; and (ii) lead to mixed-strategy equilibria with positive profits for competing operators, rather than to zero-fee, zero-profit Bertrand equilibrium. Policy proposals that require exchanges to charge one side only or to divide the total fee equally between the two sides would lead to zero make and take fees, but the welfare effects of these two proposals are mixed under tick size constraints.
*************Why Trading Speed Matters: A Tale of Queue Rationing under Price Controls
Chen Yao
University of Warwick
Mao Ye
University of Illinois at Urbana-Champaign
September 16, 2015
Abstract:
Queue rationing under price controls drives speed competition in liquidity provision. We find that a one-cent tick size generates higher revenues and longer queues of liquidity provision for lower-priced (larger relative tick size) securities. Speed allows high-frequency traders (HFTs) to establish time priority in the queue; non-HFTs are forced to demand liquidity despite increased liquidity provision revenue. Difference-in-differences tests using exchange-traded funds (ETFs) tracking the same index show that speed competition led by queuing does not affect transaction costs controlling relative tick size, but a larger relative tick size reduces liquidity and increases HFT liquidity provision.
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The high-frequency
trading paper is on:
The exchange
competition paper is on
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1 comment:
There's also a fiduciary issue, and a related Reg NMS issue that differs from the one mentioned. If I place an order with a dealer to buy a stock, say 100 shares, and it's bid at $40.00 on two different exchanged, my dealer is typically the one paying the 'taker' fees or receiving rebates for providing liquidity --- I'm paying the same commission, per my agreement with the dealer, as long as it executes, regardless of where or what the associated fees and proceeds are. The related NMS issue is limited by the ontological fact that maker/taker fees are less than half a tick; if prices were allowed to be tenths of a cent, though, if it's priced at $40.000 at one exchange and $40.001 at another exchange, it is required that the order be sent to the second exchange, even if the fees there are $.0015 per share higher. The "best price" standard ignores the fees. With continuous pricing (but the rest of NMS as is), "the manner in which operators divide the total fee between makers and takers is irrelevant" economically, but the regulation makes it relevant, just as tax and accounting rules give "money illusion" a certain degree of reality; in each case, the failure of regulation to treat economically identical things identically breaks a symmetry and can lead to somewhat perverse behavior.
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