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Tick Size, Trading Strategies, and Market Quality

Author

Listed:
  • Ingrid M. Werner

    (Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

  • Barbara Rindi

    (Innocenzo Gasparini Institute for Economic Research and Centre for Applied Research on International Markets, Money Banking and Regulation (Baffi Carefin), Bocconi University, Milan 20136, Italy)

  • Sabrina Buti

    (Dauphine Recherches en Management, Université Paris Dauphine-PSL, CNRS, Paris 75016, France)

  • Yuanji Wen

    (UWA Business School, University of Western Australia, Crawley Western Australia 6009)

Abstract

We investigate the effects of a tick-size reduction on market quality in a multiperiod limit order book market. For illiquid stocks, reducing the tick size facilitates undercutting and discourages liquidity provision, resulting in deteriorating market quality but higher volume. For liquid stocks, reducing the tick size curtails queues, resulting in lower depth and volume but narrower spread. With a competing crossing network, a tick-size reduction results in worse market quality for all stocks due to migration of order flows. We empirically test our model predictions and find support for recent tick-size reductions in Japan and the United States.

Suggested Citation

  • Ingrid M. Werner & Barbara Rindi & Sabrina Buti & Yuanji Wen, 2023. "Tick Size, Trading Strategies, and Market Quality," Management Science, INFORMS, vol. 69(7), pages 3818-3837, July.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:7:p:3818-3837
    DOI: 10.1287/mnsc.2022.4502
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    References listed on IDEAS

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    Cited by:

    1. Chung, Kiseo & Kim, Seoyoung, 2024. "Technological disparity and its impact on market quality," Journal of Empirical Finance, Elsevier, vol. 75(C).
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    3. Nihad Aliyev & Matteo Aquilina & Khaladdin Rzayev & Sonya Zhu, "undated". "Through stormy seas: how fragile is liquidity across asset classes and time?," BIS Working Papers 1229, Bank for International Settlements.

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