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Tick Size, Price Grids and Market Performance: Stable Matches as a Model of Market Dynamics and Equilibrium

Plott, Charles R. and Roll, Richard and Seo, Han and Zhao, Hao (2018) Tick Size, Price Grids and Market Performance: Stable Matches as a Model of Market Dynamics and Equilibrium. Social Science Working Paper, 1435. California Institute of Technology , Pasadena, CA. (Unpublished)

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This paper reports experiments motivated by ongoing controversies regarding tick size in markets. The minimum tick size in a market dictates discrete values at which bids and asks can be tendered by market participants. All transaction prices must occur at these discrete values, which are established by the rules of each exchange. The simplicity of experiments helps to distinguish among competing models of complex real-world securities markets. We observe patterns predicted by a matching (cooperative game) model. Because a price grid damages the equilibrium of the competitive model, the matching model provides predictions where the competitive model cannot. Their predictions are the same when a competitive equilibrium exists. The experiment examines stable allocations, average prices, timing of order flow and price dynamics. Larger tick size invites more speculation, which in turn increases liquidity. However, increased speculation leads to inefficient trades that otherwise would not have occurred.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemPublished version (Games and Economic Behavior, 118 . pp. 7-28)
Seo, Han0000-0002-5116-3286
Additional Information:Original version accepted January 8, 2018. Revised version accepted Feb 9, 2018. The research support of the John Templeton Foundation is gratefully acknowledged. The authors thank Travis Maron and Hsing Yang Lee of the Caltech Laboratory for Experimental Economics and Political Science, for their assistance and advice. We thank Anmol Ratan and Jun Chen for their many helpful comments.
Group:Social Science Working Papers
Funding AgencyGrant Number
John Templeton FoundationUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:1435
Record Number:CaltechAUTHORS:20191023-145648029
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:99416
Deposited By: Katherine Johnson
Deposited On:23 Oct 2019 22:10
Last Modified:23 Oct 2019 22:10

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