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Minimum Price Variations, Time Priority and Quote Dynamics

Abstract : We analyze price competition between dealers in a security market where the bidding process is sequential. The model provides an interpretation for the evolution of the best ask and bid prices, in between transactions. We find that convergence to the competitive ask and bid prices can take time. The speed of convergence is determined by the frequency with which dealers check their offers and by the tick size. This creates a relationship between the expected trading cost and the timing of offers posted by the dealers. We also find that a zero minimum price variation never minimizes the expected trading cost. Finally, we study the role of time priority. Journal of Economic Literature
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Submitted on : Thursday, February 25, 2010 - 10:03:52 AM
Last modification on : Thursday, January 11, 2018 - 6:19:31 AM

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Thierry Foucault, Tito Cordella. Minimum Price Variations, Time Priority and Quote Dynamics. Journal of Financial Intermediation, Elsevier, 1999, Vol.8,n°3, pp.141-173. ⟨10.1006/jfin.1999.0266⟩. ⟨hal-00459772⟩

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