Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence.
Additional Document Info
The authors analyze the effects of a finite tick size and the practice of
'payment-for-order flow' on market competition. Even if the New York Stock
Exchange (NYSE) reservation price is superior to its non-NYSE counterpart,
brokers may, because of payment-for-order flow, prefer to execute orders
off the NYSE floor. In accordance with the implications of the model,
empirical analysis suggests that non-NYSE marketmakers trade a larger
fraction of the smaller order sizes and offer fewer price improvement
opportunities and that large companies appear to have enhanced price
improvement opportunities on the NYSE. Copyright 1995 by University of Chicago Press.