Market making with discrete prices

Exchange-mandated discrete pricing restrictions create a wedge between the underlying equilibrium price and the observed price This wedge permits a competitive market maker to realize economic profits that could help recoup fixed costs. The optimal tick sire that maximizes the expected profits of the market matter can be equal to $1/8 for reasonable parameter values. The optimal tick, size is decreasing in the degree of adverse selection. Discreteness per se can cause time-varying bid-ask spreads, asymmetric commissions, and market breakdowns. Discreteness, which imposes additional transaction costs, reduces the value of private information. Liquidity traders can benefit under certain conditions.