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Discrete Pricing and Market Fragmentation: A Tale of Two-Sided Markets

Yong Chao¹; Chen Yao²; Mao Ye³

¹ University of Louisville · ² University of Warwick · ³ University of Illinois Urbana-Champaign

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.

DOI

10.1257/aer.p20171046

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