Minimum price variations, time priority, and quote dynamics

We analyze price competition between dealers in a security market where the bidding process is sequential. The model provides an interpretation for the evolution of the best ash and bid prices, in between transactions. We find that convergence to the competitive ask and bid prices can take time. The speed of convergence is determined by the frequency with which dealers check their offers and by the rick size. This creates a relationship between the exceed trading cost and the timing of offers posted by the dealers. We also find that a zero minimum price variation never minimizes the expected trading cost. Finally, we study the role of time priority. Journal of Economic Literature Classification Numbers: D43, G10. (C) 1999 by Academic Press.