Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets
American Economic Review · 2017 · Volume 107 · Issue 5
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.
Keywords
Market Structure, Pricing, and Design: Perfect Competition, Asset Pricing, Trading volume, Bond Interest Rates, Information and Market Efficiency, Event Studies, Insider Trading
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