Citation

Discussion Paper Details

Please find the details for DP1717 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Minimum Price Variations, Time Priority and Quote Dynamics

Author(s): Tito Cordella and Thierry Foucault

Publication Date: October 1997

Keyword(s): Market-Microstructure, Quote Formation, Tick Size, Time Priority and Trading Costs

Programme Area(s): Financial Economics

Abstract: This paper analyses the impact of a minimum price variation (tick) and time priority on the quote dynamics and on trading costs when competition for the order flow is dynamic. It finds that convergence to competitive prices can take time and that the speed of convergence is influenced by the tick size, the priority rule and the characteristics of the order arrival process. It also shows that a zero minimum price variation is never optimal when competition for the order flow is dynamic. The paper compares the trading outcomes with and without time priority. It shows that, for reasonable parameterizations, time priority reduces trading costs because it prevents equilibria in which uncompetitive spreads can be sustained. Finally, the paper relates (a) the trading costs to the speed with which liquidity suppliers react to their competitors? offers and (b) the dynamics of the best price in the market to the state of the book.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1717

Bibliographic Reference

Cordella, T and Foucault, T. 1997. 'Minimum Price Variations, Time Priority and Quote Dynamics'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1717