An evolutionary multi‐objective optimization of trading rules in call markets

We evaluate an agent‐based model featuring near‐zero‐intelligence traders operating in a call market with a wide range of trading rules governing the determination of prices and which orders are executed, as well as a range of parameters regarding market intervention by market makers and the presence of informed traders. We optimize these trading rules using a multi‐objective population‐based incremental learning algorithm seeking to maximize the trading volume and minimize the bid–ask spread. Our results suggest that markets should choose a small tick size if concerns about the bid–ask spread are dominating and a large tick size if maximizing trading volume is the main aim. We also find that unless concerns about trading volume dominate, time priority is the optimal priority rule. Copyright © 2011 John Wiley & Sons, Ltd.     

One size fits all? High frequency trading,tick size changes and the implications for exchanges: market quality and market structure considerations

This paper offers a systematic review of the empirical literature on the implications of tick size changes for exchanges. Our focus is twofold: first, we are concerned with the market quality implications of a change in the minimum tick size. Second, we are interested in the implications of changes in the minimum tick size on market structure. We show that there is a large body of empirical literature that documents a decrease in transaction costs following a decrease in the minimum tick size. However, even though market liquidity increases, the incentive to provide market making activities decreases. We document a strong link between the minimum tick size regulations and the recent increase in high frequency trading activity. A smaller tick enhances the price discovery process. However, the question of how multiple tick size regimes affect market liquidity in a fragmented market remains to be answered. Finally, we identify topics for future research; we discuss the empirical literature on the minimum trade unit and the recent calls for a minimum resting time for quotes.     

Decimalization,adverse selection,and market maker rents

I address the issue of how decimalization impacts the information acquisition decision of traders. I show that traders have less of an incentive to improve the quality of their information and, consequently, trades tend to be less informative following a reduction in the minimum tick. This result is consistent with the empirical finding that reductions in the minimum tick lead to declines in the adverse selection component, a finding counter to the theoretical predictions in the literature. This result also explains how the predicted savings from decimalization can exceed even total market maker profits. In addition, I show that even if market makers are perfectly competitive, a minimum tick can lead to multiple spread equilibria, some of which being more than one tick away from the underlying, or “no-tick”, equilibrium spread. Finally, I discuss the implications of the model for payment for order flow/internalization and the existence of an optimal tick size.     

Tick Size,Spreads, and Liquidity: An Analysis of Nasdaq Securities Trading near Ten Dollars

Quoted and effective bid–ask spreads on Nasdaq are two to four cents per share narrower, ceteris paribus, when stocks trade with a smaller tick size below $10 per share. There is no evidence of a reduction in liquidity with the smaller tick size. The largest spread reductions occur for stocks whose market makers avoid odd-eighth quotes. This finding provides support for models implying that changes in the tick size can affect equilibrium spreads on a dealer market and indicates that the relation between tick size and market quality is more complex than the imposition of a constraint on minimum spread widths. Journal of Economic Literature Classification Numbers: G29, D34, N20.     

Structural changes,bid–ask spread composition and tick size in inter-bank futures trading

This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid–ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid–ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes.     

Hybrid markets, tick size and investor trading costs

This paper shows how the tick size affects equilibrium outcomes in a hybrid stock market such as the NYSE that features both a specialist and a limit order book. Reducing the tick size facilitates the specialist's ability to step ahead of the limit order book, resulting in a reduction in the cumulative depth of the limit order book at prices above the minimum tick. If market demand is price-sensitive, and there are costs of limit order submission, the limit order book can be destroyed by tick sizes that are either too small or too large. We show that trading cost is minimized at larger tick sizes for larger market orders, creating an incentive to submit smaller orders when tick size is reduced. With a smaller tick size, specialist participation increases and specialist profit increases slightly for small market orders, and considerably for large market orders.     

Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price

Abstract:  In this study we analyze the effect of tick size on information-based trading. Although prior studies provide extensive evidence on the effect of tick size on market quality measures such as spreads, depths, and return volatility, there is little evidence as to the effect of tick size on the informational efficiency of asset price. Our results indicate that the probability of information-based trading during the post-decimal period is significantly greater than the corresponding figure during the pre-decimal period. We also show that the increase in information-based trading after decimalization cannot be attributed to concurrent changes in stock attributes. We interpret our findings as evidence that the smaller tick size under penny pricing encourages information-based trading and thereby raises the informational efficiency of asset price.     

Human vs. high-frequency traders,penny jumping,and tick size

This paper examines changes in market quality resulting from the smaller tick size of the interbank foreign exchange market. Coupled with the lower tick size, the special composition of traders and their order placement strategies created a suitable environment for high-frequency traders (HFT’s) to implement sub-penny jumping strategy to front-run human traders. We show that the spread declined following the introduction of decimal pip pricing. However, benefits of spread reduction were mostly absorbed by the HFT’s. Market depths were also significantly reduced with the occupation of the top of the order book by HFT’s. This new environment changed the market maker-market taker composition between different traders and altered price impacts of the order flows.     

Pricing Efficiency in a Thin Market with Competitive Market Makers: Box Spread Strategies in the Hang Seng Index Options Market

Using a box spread arbitrage strategy, we examine the pricing efficiency of the emerging, thinly traded Hang Seng Index options market in Hong Kong, where market makers operate under a competitive open outcry system. In 20 months of tick‐by‐tick bid‐ask and transaction quotes we find very few arbitrage opportunities. Our examination of the reporting time of quotes shows that in effect, all the apparent mispricings are deceptive and could be explained by stale quotes. The absence of real arbitrage opportunities supports the pricing rationality hypothesis in the Hong Kong options market.     

The effect of tick size on managerial learning from stock prices

We investigate the effect of tick size, a key feature of market microstructure, on managerial learning from stock prices. Using a randomized controlled tick-size experiment, the 2016 Tick Size Pilot Program, we find that a larger tick size increases a firm's investment sensitivity to stock prices, suggesting that managers glean more new information from stock prices to guide their investment decisions as the tick size increases. Consistently, we also find that changes in managerial beliefs, as reflected in adjustments of forecasted capital expenditures, respond more strongly to market feedback under a larger tick size. Additional evidence suggests the following mechanism through which tick size affects managerial learning: a larger tick size reduces algorithmic trading, in turn encouraging fundamental information acquisition. Increased fundamental information acquisition generates incremental information about growth opportunities, macroeconomic factors, and industry factors, with respect to which the market has a comparative information advantage over management.     

Price Clustering on the Tokyo Stock Exchange

This paper examines price clustering on the Tokyo Stock Exchange (TSE). Regardless of tick and lot size, prices ending in zero and five are the most popular. The TSE has no market makers or direct negotiation between traders; therefore, clustering is not explained by collusion or negotiation. Our evidence supports the attraction hypothesis. Clustering also extends to order book depth. There is evidence of strategic trading behavior as traders place orders one price tick better than zero and five to avoid queuing orders at prices ending in these digits. Strategic trading behavior declined and clustering increased when the market became anonymous.     

The diversity of high-frequency traders

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion's share of HFT trading volume (63–72%) and limit order traffic (81–86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.     

So who gains from a small tick size?

We investigate the relation between price discreteness and the number of dealers in a dealer market. We present a model featuring a finite number of dealers competing in prices for supplying liquidity to a forthcoming market order. We find that a decrease in tick size benefits dealers and tends to hurt investors when the number of dealers for a stock is small. In contrast, a decrease in tick size hurts dealers and benefits investors when the number of dealers is large. This result yields several new empirical implications relating a change in tick size to entry and exit of dealers, order aggressiveness and transaction rates.     

LIQUIDITY AND QUOTE CLUSTERING IN A MARKET WITH MULTIPLE TICK SIZES

We analyze market liquidity (i.e., spreads and depths) and quote clustering using data from the Kuala Lumpur Stock Exchange (KLSE), where the tick size increases with share price in a stepwise fashion. We find that stocks that are subject to larger mandatory tick sizes have wider spreads and less quote clustering. We also find that liquidity providers on the KLSE do not always quote larger depths for stocks with larger tick sizes. Overall, our results suggest that larger tick sizes for higher priced stocks are detrimental to market liquidity, although the adverse effect of larger tick sizes is mitigated by lower negotiation costs (i.e., less quote clustering).     

夯实做市商制度建设协力推进外汇市场发展

近年来,外汇市场汇价波幅逐步有序拓宽,而面对不断扩大的汇率波幅,一些做市机构的交易员出现了不适应的情况。文章指出,外汇做市商制度的切实履行和健全完善,对于规范做市交易与市场良性交易氛围的形成和推广,具有至关重要的作用。文章介绍了我国外汇市场建立做市商制度的目的、所采取的相关配套制度改革,展望做市商考评机制的改进方向,并就进一步规范外汇市场发展提出相关倡议。     

Stock markets, banks, and economic growth: Empirical evidence from the MENA region

Over the last four decades, a wide theoretical debate is concerned with the fundamental relationship between financial development and economic growth. Recent studies shed some light on the simultaneous effect of banks and financial system development on growth rather than a separate impact. The empirical study is conducted using an unbalanced panel data from 11 MENA region countries. Econometric issues will be based on estimation of a dynamic panel model with GMM estimators. Thus, peculiarities of MENA region countries will be detected. The empirical results reinforce the idea of no significant relationship between banking and stock market development, and growth. The association between bank development and economic growth is even negative after controlling for stock market development. This lack of relationship must be linked to underdeveloped financial systems in the MENA region that hamper economic growth. Then, more needs to be done to reinforce the institutional environment and improve the functioning of the banking sector in the MENA region. Based on these results, other regions at the same stage of financial development such as Africa, Eastern Europe or Latin America should improve the functioning of their financial system in order to prevent their economies from the negative impact of a shaky financial market.     

金融期货最小价格变化单位的市场影响与最优水平

最小价格变化单位是买卖价差的底线，设置过高会人为地提高买卖价差的水平，增加交易费用；过低又会降低市场深度，增加交易谈判成本，影响交易效率。对最优价格升降档位的设定，要综合考虑精度要求、合约乘数、交易谈判成本和实际买卖价差水平等因素；而以实际买卖价差的底线作为最小价格升降档位，能较好地避免人为抬高买卖价差的情况出现。     

Liquidity provision with limit orders and a strategic specialist

This article presents a microstructure model of liquidity provisionin which a specialist with market power competes against a competitivelimit order book. General solutions, comparative statics andexamples are provided first with un-informative orders and thenwhen order flows are informative. The model is also used toaddress two optimal market design issues. The first is the effectof 'tick' size - for example, eighths versus decimal pricing- on market liquidity. Institutions trading large blocks havea larger optimal tick size than small retail investors, butboth prefer a tick size strictly greater than zero. Second,a hybrid specialist/limit order market (like the NYSE) providesbetter liquidity to small retail and institutional trades, buta pure limit order market (like the Paris Bourse) may offerbetter liquidity on mid-size orders.     

欧美国债市场做市商制度分析与比较

考察国外债券市场发展的实践,我们发现做市商制度是活跃国债市场不可缺少的因素,起着举足轻重的作用.目前,我国银行间债券市场虽然也存在做市商制度,但是有行无市的困扰一直存在,形同虚设.本文重点对美国国债市场和欧洲MTS市场的做市商制度进行介绍,以期对我国国债市场做市商制度的发展和完善起到一定的借鉴作用.     

Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange

This paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid‐ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.