The authors thank an anonymous referee, the editor, Kenneth Kim, Lewis Mandell, Joe Ogden, and seminar participants at SUNY-Buffalo for valuable comments and discussions.
Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price
Version of Record online: 23 JUN 2006
Journal of Business Finance & Accounting
Volume 33, Issue 5-6, pages 753–766, June/July 2006
How to Cite
Zhao, X. and Chung, K. H. (2006), Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price. Journal of Business Finance & Accounting, 33: 753–766. doi: 10.1111/j.1468-5957.2006.00622.x
- Issue online: 23 JUN 2006
- Version of Record online: 23 JUN 2006
- (Paper received June 2005, revised version accepted December 2005)
- tick size;
- information-based trading;
- PIN measure;
- information effiency
Abstract: In this study we analyze the effect of tick size on information-based trading. Although prior studies provide extensive evidence on the effect of tick size on market quality measures such as spreads, depths, and return volatility, there is little evidence as to the effect of tick size on the informational efficiency of asset price. Our results indicate that the probability of information-based trading during the post-decimal period is significantly greater than the corresponding figure during the pre-decimal period. We also show that the increase in information-based trading after decimalization cannot be attributed to concurrent changes in stock attributes. We interpret our findings as evidence that the smaller tick size under penny pricing encourages information-based trading and thereby raises the informational efficiency of asset price.