Working Paper: NBER ID: w21286
Authors: Robert P. Bartlett III; Justin McCrary
Abstract: Using over eight trillion observations of market data, we use a regression discontinuity design to analyze the effect of increasing the minimum price variation (MPV) for quoting equity securities in light of recent proposals to increase the MPV from $0.01 to $0.05. We show that a larger MPV encourages investors to trade in dark venues at the midpoint of the national best bid and offer. Enhanced order flow to dark venues reduces price competition by exchange liquidity providers, especially those using high frequency trading (HFT). Trading in dark venues due to a wider MPV reduces volatility and increases trading volume.
Keywords: dark trading; minimum price variation; liquidity provision; high frequency trading
JEL Codes: G10; G15; G18; G23; G28; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the MPV from $0.01 to $0.05 (C54) | Increase in trading in dark venues at the midpoint of the NBBO (G19) |
| Increasing the MPV from $0.01 to $0.05 (C54) | Decrease in displayed liquidity on public exchanges (G19) |
| Wider MPV (C59) | Increased trading volume in dark venues (G19) |
| Wider MPV (C59) | Reduced price competition among exchange liquidity providers (D49) |