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The Effect of Tick Size on Price Clustering and Trading Volume
Author(s) -
Hameed Allaudeen,
Terry Eric
Publication year - 1998
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00216
Subject(s) - tick size , stock (firearms) , order (exchange) , economics , volume weighted average price , financial economics , cluster analysis , monetary economics , stock exchange , volume (thermodynamics) , algorithmic trading , stock price , business , cost price , biology , finance , mathematics , statistics , geography , physics , quantum mechanics , paleontology , series (stratigraphy) , archaeology
Proposals have been made for some stock exchanges to reduce the size of their trading tick in order to lower transactions costs and, as a result, attract more trading volume and firm listings. We investigate the impact of tick size on price clustering and trading volume when the minimum price change varies with price level. Controlling the firm specific variables, we find that a smaller trading tick tends to exacerbate price clustering. Furthermore, a reduction in tick size is more likely to increase trading volume if the shares are heavily traded. These results suggest that previous studies on other stock markets may have overstated the benefits of a smaller trading tick to traders.