Minimum Price Variations, Discrete Bid–Ask Spreads, and Quotation Sizes

TLDR

Exchange minimum price variation rules create discrete bid‑ask spreads, and when the minimum quotable spread exceeds the natural spread, it widens spreads and increases the number of shares quoted at each side. The authors estimate a cross‑sectional discrete spread model from intraday quotation frequencies, use it to project spread usage at a 1/16 tick, and derive regression‑based predictions of quotation size and volume changes. For sub‑$10 stocks, the model forecasts a 38 % reduction in spreads, a 16 % drop in quotation sizes, and a 34 % rise in daily volume.

Abstract

Exchange minimum price variation regulations create discrete bid–ask spreads. If the minimum quotable spread exceeds the spread that otherwise would be quoted, spreads will be wide and the number of shares offered at the bid and ask may be large. A cross-sectional discrete spread model is estimated by using intraday stock quotation spread frequencies. The results are used to project |${\boldsymbol $} {\textstyle{1 \over {16}}}$| spread usage frequencies given a |${\boldsymbol $} {\textstyle{1 \over {16}}}$| tick. Projected changes in quotation sizes and in trade volumes are obtained from regression models. For stocks priced under $10, the models predict spreads would decrease 38 percent, quotation sizes would decrease 16 percent, and daily volume would increase 34 percent.