Decimal pricing and information-based trading: Tick size and informational efficiency of asset price

Xin Zhao, Kee H. Chung

Research output: Contribution to journalArticlepeer-review

15 Scopus citations

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. Journal compilation

Original languageEnglish (US)
Pages (from-to)753-766
Number of pages14
JournalJournal of Business Finance and Accounting
Volume33
Issue number5-6
DOIs
StatePublished - Jun 1 2006

All Science Journal Classification (ASJC) codes

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

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