Please use this identifier to cite or link to this item: https://repository.iimb.ac.in/handle/2074/10351
Title: Market making with discrete prices
Authors: Anshuman, V Ravi 
Kalay, Avner 
Keywords: Financial management;Financial studies
Issue Date: 1998
Publisher: Oxford University Press
Abstract: Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price. This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick size that maximizes the expected profits of the market maker can be equal to $1/8 for reasonable parameter values. The optimal tick size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.
URI: http://repository.iimb.ac.in/handle/2074/10351
DOI: 10.1093/rfs/11.1.81
Appears in Collections:1990-1999

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