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Cambridge Finance Seminar - Maureen O'Hara

When May 01, 2014
from 05:00 PM to 06:00 PM
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The Cambridge Finance Seminar

 

Thursday 1st May 2014, 5-6pm,

Graham Storey Room, Trinity Hall

5-6pm

Professor Maureen O’Hara (Cornell)

Area Coordinator of Finance
Robert W. Purcell Professorship of Management
Professor of Finance
 

 Relative Tick Size and the Trading Environment

 

Abstract

Recent proposals to raise the tick size on small stocks bring attention to the role played by market structure in shaping the trading environment and ultimately in capital formation. In this paper, we look at the how the relative tick size influences liquidity and the biodiversity of trader interactions in the market. Using unique order-level data from the NYSE, we find mixed evidence on whether a larger relative tick size enhances liquidity. Specifically, depth closer to market prices as well as fill rates of limit orders are higher with a larger relative tick size, but resiliency of depth at the best prices is lower and there is a shift to less displayed depth. We observe that high-frequency trading firms that operate as market makers on the NYSE take on a more prominent role in liquidity provision for stocks with larger relative tick sizes: spending more time at the quote, improving market-wide prices, and increasing their participation in trading. A larger relative tick size does not, however, seem to attract more overall trading volume from investors to the stocks, and we find that some volume shifts from the primary market to other (non-exchange) trading venues.

 

 

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