Market Making, the Tick Size, and Payment-for-Order Flow: Theory and Evidence.

The authors analyze the effects of a finite tick size and the practice of 'payment-for-order flow' on market competition. Even if the New York Stock Exchange (NYSE) reservation price is superior to its non-NYSE counterpart, brokers may, because of payment-for-order flow, prefer to execute orders off the NYSE floor. In accordance with the implications of the model, empirical analysis suggests that non-NYSE marketmakers trade a larger fraction of the smaller order sizes and offer fewer price improvement opportunities and that large companies appear to have enhanced price improvement opportunities on the NYSE. Copyright 1995 by University of Chicago Press.