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I was really just trying to make the points that 1) the minimum price variation of 1/8 of a dollar probably made sense at some point in the past (NYSE being sta

by minimax 13y ago

I was really just trying to make the points that 1) the minimum price variation of 1/8 of a dollar probably made sense at some point in the past (NYSE being started in the early 19th century) 2) sometimes it's more than just market makers who want larger tick sizes (consider this post from a managing partner at Andreesen Horowitz†) and 3) you can reduce the minimum price variation (the "tick size") without doing decimalization (i.e. smaller fractions) and vice versa -- you can set the minimum price variation at sizes larger than a penny even with decimalized quotations. † http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class/ http://blog.pmarca.com/2013/03/26/unshackle-the-middle-class...

tptacek 13y ago
I'm not sure what this comment means. You said, earlier: "but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature." I think I refuted that, effectively. Can you artificially inflate spreads without making inflated spreads the explicit law of the market by quoting in 1/8ths? Sure. Is that what happens? No.
- minimax 13y ago
  I thought you were making a distinction between quoting in fractions of a dollar vs quoting in pennies. It isn't really material. If you quote in fractions but allow the minimum price variation to be 1/128th of a dollar you have a market that allows for tighter spreads than one in which the minimum price variation is a penny. There is nothing wrong with prices in fractions of a dollar. What matters is the minimum price variation a.k.a. the tick size.
  - tptacek 13y ago
    It is material, because the fractions of dollars we're talking about were bigger than 1/100th of a dollar. Clearly, they could have moved to sub-decimal fractions, but the point isn't "fractions" versus "decimals"; it's "human market makers fixed the fractions at 1/8ths and 1/16ths of a dollar to artificially increase the spread", versus "algorithmic trading competed the spread down below a penny". You implied that maybe humans had been using fractions because they were easier to deal with. No. They were using the fractions they were using in order to skim extra money off trades, and they fought tooth and nail to prevent competition from reducing spreads below 1/8ths --- in fact, if you read the link I showed you, it wasn't even 1/8ths; it was 1/4s!
    - minimax 13y ago
      What I meant to imply was that the emergence of fractional dollar tick sizes was probably due to the fact that they were easier to deal with before the advent of computerized execution, clearing, and settlement. By the mid nineties most of that had been automated and there was therefore no good reason for such large tick sizes. When humans were still doing all trade processing manually, it made sense to have a system that incentivized fewer large trades (vs more smaller trades). Large minimum price variations and round lot requirements would have been a means to that end.

by minimax 13y ago

tptacek 13y ago

I'm not sure what this comment means. You said, earlier: "but to say that they were using a weird fractional system because they wanted to rip people off isn't documented anywhere in the literature." I think I refuted that, effectively. Can you artificially inflate spreads without making inflated spreads the explicit law of the market by quoting in 1/8ths? Sure. Is that what happens? No.

minimax 13y ago
I thought you were making a distinction between quoting in fractions of a dollar vs quoting in pennies. It isn't really material. If you quote in fractions but allow the minimum price variation to be 1/128th of a dollar you have a market that allows for tighter spreads than one in which the minimum price variation is a penny. There is nothing wrong with prices in fractions of a dollar. What matters is the minimum price variation a.k.a. the tick size.
- tptacek 13y ago
  It is material, because the fractions of dollars we're talking about were bigger than 1/100th of a dollar. Clearly, they could have moved to sub-decimal fractions, but the point isn't "fractions" versus "decimals"; it's "human market makers fixed the fractions at 1/8ths and 1/16ths of a dollar to artificially increase the spread", versus "algorithmic trading competed the spread down below a penny". You implied that maybe humans had been using fractions because they were easier to deal with. No. They were using the fractions they were using in order to skim extra money off trades, and they fought tooth and nail to prevent competition from reducing spreads below 1/8ths --- in fact, if you read the link I showed you, it wasn't even 1/8ths; it was 1/4s!
  - minimax 13y ago
    What I meant to imply was that the emergence of fractional dollar tick sizes was probably due to the fact that they were easier to deal with before the advent of computerized execution, clearing, and settlement. By the mid nineties most of that had been automated and there was therefore no good reason for such large tick sizes. When humans were still doing all trade processing manually, it made sense to have a system that incentivized fewer large trades (vs more smaller trades). Large minimum price variations and round lot requirements would have been a means to that end.