Minimum price variations, time priority and quotes dynamics

We analyze the impact of a minimum price variation (tick) and time priority on the dynamics of quotes and the trading costs when competition for the order flow is dynamic. We find that convergence to competitive outcomes can take time and that the speed of convergence is influenced by the tick size, the priority rule and the characteristics of the order arrival process. We show also that a zero minimum price variation is never optimal when competition for the order flow is dynamic. We compare the trading outcomes with and without time priority. Time priority is shown to guarantee that uncompetitive spreads cannot be sustained over time. However it can sometimes result in higher trading costs. Empirical implications are proposed. In particular, we relate the size of the trading costs to the frequency of new offers and the dynamics of the inside spread to the state of the book.