Does a Large Minimum Price Variation Encourage Order Exposure?

Lawrence Harris, USC Working Paper, October 1996.

Abstract

The minimum price variation (tick) affects order exposure. Traders who display their orders risk being front-run. In markets that enforce time precedence, the tick makes front-running expensive. It sets the price of obtaining order precedence through price priority when another trader has time precedence. This paper examines order, quotation, and transaction data from the Paris Bourse and the Toronto Stock Exchange to characterize the relation between tick size and order exposure. The results show that traders display more size when the tick is large and when intraday volatility is small. The topic is particularly timely given recent regulatory interest in reducing tick sizes.

Key words: Minimum price variations, tick, time precedence, order transparency, order display, order disclosure, hidden orders, quotation sizes, electronic exchanges, front-running, order option values.

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Last revised 10/27/96.