Sub-Penny and Queue-Jumping

Abstract

Sub-Penny Trading (SPT) is a form of dark trading that allows traders to undercut displayed liquidity. We distinguish between SPT that is queue jumping (QJ) and midcrossing (MID) and find that QJ is higher for NASDAQ than NYSE stocks. Consistently with Buti, Rindi, Wen and Werner (2013), QJ is positively related to depth and negatively related to stock price. We also find that QJ is associated with improved lit market quality, especially for large capitalization stocks. Sub-penny quotes are allowed for stocks priced below $1.00, and we use this fact to show that the spread improves but depth deteriorates as the price of a stock crosses from above to below ($1.00).2

Increasing the Tick: Examining the Impact of the Tick Size Change on Maker‐Taker and Taker‐Maker Market Models

“…To the extent that increases in market share in taker‐maker fee models is driven by queue‐jumping, then the level of algorithmic trading may be impacted. Buti, Consonni, Rindi, Wen and Werner () posit that the level of algorithmic trading is inversely related with queue‐jumping . However, Ye and Yao () suggest that a larger relative tick size reduces the impact of the trader quoting the best prices while allowing the trader with the fastest speed to gain priority.…”

“…To the extent that the inverted fee model offers traders a chance to bypass tick size constraints by paying the venue fee, the level of algorithmic trading on maker‐taker models may decline. Further, if queue‐jumping activity increases on taker‐maker models following the tick size increase, then algorithmic trading could decrease as described by Buti, Consonni, Rindi, Wen and Werner ().…”

“…They also suggest that due to the fragmented markets that exist today, increasing the tick size will incentivize dealers and proprietary traders to engage in quote‐matching practices that allow traders to undercut current limit orders. Likewise, Buti, Consonni, Rindi, Wen and Werner () argue a wider tick increases the presence of queue‐jumping activity to gain priority of resting limit orders. Thus, to the extent we find that increasing the tick size increases the presence of taker‐maker activity, one unintended consequence is that quote‐matching could increase.…”

Competition Between Equity Markets: A Review of the Consolidation Versus Fragmentation Debate

“…11 The rather limited literature on tick size as a determinant of liquidity in a setting of competing markets has found beneficial effects of a reduction in tick size. Buti et al (2015a) study both theoretically and empirically the competition between an exchange operating a public limit order book (PLB) and an alternative trading venue (subpenny venue or SPV) capable of undercutting the regulated tick size prevalent on the exchange. Their model contains broker-dealers who have the exclusive right to post limit orders on the SPV and regular traders who supply liquidity only on the PLB.…”

Market Manipulation as a Security Problem

“…In theory, these order types were accessible to all market participants and thus everyone could bump up the priority of their orders. However, in many cases exchange operators selectively disclosed them only to a subset of their clients and failed to inform everyone else about their existence and operation (Operational Transparency property) [4,19,14,3]. Nevertheless, these order types were exploitable only by sophisticated traders with knowledge of the precedence rules, very low-latency links and high processing power.…”