Hybrid markets, tick size and investor trading costs

Evgenia Portniaguina, Dan Bernhardt, Eric Hughson

Research output: Contribution to journalArticlepeer-review


This paper shows how the tick size affects equilibrium outcomes in a hybrid stock market such as the NYSE that features both a specialist and a limit order book. Reducing the tick size facilitates the specialist's ability to step ahead of the limit order book, resulting in a reduction in the cumulative depth of the limit order book at prices above the minimum tick. If market demand is price-sensitive, and there are costs of limit order submission, the limit order book can be destroyed by tick sizes that are either too small or too large. We show that trading cost is minimized at larger tick sizes for larger market orders, creating an incentive to submit smaller orders when tick size is reduced. With a smaller tick size, specialist participation increases and specialist profit increases slightly for small market orders, and considerably for large market orders.

Original languageEnglish (US)
Pages (from-to)433-447
Number of pages15
JournalJournal of Financial Markets
Issue number4
StatePublished - Nov 2006

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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