We analyze the impact of a minimum price variation (tick) and time
priority on the dynamics of quotes and the trading costs when competition
for the order flow is dynamic. We find that convergence to competitive
outcomes 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. We show also that a zero minimum price variation is never
optimal when competition for the order flow is dynamic. We compare the
trading ...
We analyze the impact of a minimum price variation (tick) and time
priority on the dynamics of quotes and the trading costs when competition
for the order flow is dynamic. We find that convergence to competitive
outcomes 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. We show also that a zero minimum price variation is never
optimal when competition for the order flow is dynamic. We compare the
trading outcomes with and without time priority. Time priority is shown
to guarantee that uncompetitive spreads cannot be sustained over time.
However it can sometimes result in higher trading costs. Empirical
implications are proposed. In particular, we relate the size of the
trading costs to the frequency of new offers and the dynamics of the
inside spread to the state of the book.
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