Sixteenths or pennies? observations from a simulation of the Nasdaq Stock Market

摘要

We have built a realistic model of a dealer-mediated market. We have focused our main effort on evaluation of tick size effects. There are simple arguments that suggest that reducing the tick size may encourage competition and reduce the spread. However, there are more subtle issues concern mg the effect of a reduced tick size on volatility, volume, the likelihood of crossed markets, the ease with which Market Makers can provide liquidity (in both small and large orders), the transparency of information flow in the market, and finally the efficiency of price discovery. Our results suggest that at least some of these "fuzzier" effects are adversely impacted by a reduction in tick size. We have also observed in the simulation many important characteristics of real-world markets, such as the existence of fat tails, excessive volatility, and spread clustering. Additional research is necessary to better understand those effects, in particular, calibrating the model (for example, market makers' strategies) with real-world data.