Market Microstructure of the Pink Sheets
Journal of Banking and Finance 33, p.1326-1339, 2009

Nicolas P.B. Bollen and Bill Christie

ABSTRACT
We study the microstructure of the Pink Sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market. Clustering patterns in quotes, quoted spreads, and trade prices indicate that market participants have endogenously selected price-dependent tick sizes for different stocks. Clustering intensity varies across stocks as a function of proxies for information availability. Similarly, the bid-ask spread varies as a function of volatility and liquidity. We design a tick size schedule for the Pink Sheets that conforms to the clustering present in quotes, and track measures of market quality after the market adopted the schedule in 2006. No evidence of deterioration is found, suggesting that the marketís endogenously selected tick sizes are robust.