Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets
American Economic Review
vol. 107,
no. 5, May 2017
(pp. 196-99)
Abstract
Security trading now fragments into more than ten almost identical stock exchanges in the United States. We show that discrete pricing is one economic force that prevents the consolidation of trading volume. The uniform one-cent tick size (minimum price variation), imposed by the SEC's Rule 612, leads to more dispersed trading for lower priced securities. When a security reverse splits, its price increases and relative tick size (one cent divided by the price) decreases. We find that reverse splits consolidate trading of securities, using securities with identical underlying fundamentals that do not reverse split as the control group.Citation
Chao, Yong, Chen Yao, and Mao Ye. 2017. "Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets." American Economic Review, 107 (5): 196-99. DOI: 10.1257/aer.p20171046Additional Materials
JEL Classification
- D41 Market Structure, Pricing, and Design: Perfect Competition
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- G14 Information and Market Efficiency; Event Studies; Insider Trading