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U.S. Tick Size Pilot

Author

Listed:
  • Rindi, Barbara

    (Bocconi University)

  • Werner, Ingrid M.

    (Ohio State University)

Abstract

The U.S. equity markets are currently conducting a pilot study of the effects of a larger tick size on market quality and on the rewards for liquidity provision. We show that the larger tick size causes quoted and effective spreads, but also depth, to increase. This raises the cost for retail-sized liquidity demanding orders by almost fifty percent. However, average trade size increases, suggesting that institutions may benefit from the deeper quotes. The larger tick size translates into forty percent higher profits to liquidity providers despite larger price impacts. We attribute these changes mainly to the changes in tick size for displayed quotes, while there are modest or no effects of requiring all trades to execute on a coarser price grid. Moreover, the bulk of the effects occur for tick-constrained stocks which trading costs more than double. By contrast, trading costs for unconstrained stocks decline by more than ten percent. Finally, we document significant spillovers to stocks with unchanged tick size. Our evidence suggests that some market makers left stocks trading in decimals for the more lucrative pilot stocks, and that the reduced competition causes quoted spreads and rewards for liquidity provision to increase also for stocks trading in decimals.

Suggested Citation

  • Rindi, Barbara & Werner, Ingrid M., 2017. "U.S. Tick Size Pilot," Working Paper Series 2017-18, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2017-18
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    Citations

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    Cited by:

    1. Brauneis, Alexander & Mestel, Roland & Riordan, Ryan & Theissen, Erik, 2022. "Bitcoin unchained: Determinants of cryptocurrency exchange liquidity," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 106-122.
    2. Griffith, Todd G. & Roseman, Brian S., 2019. "Making cents of tick sizes: The effect of the 2016 U.S. SEC tick size pilot on limit order book liquidity," Journal of Banking & Finance, Elsevier, vol. 101(C), pages 104-121.
    3. Zhenhua Chen & Adrienna Huffman & Gans Narayanamoorthy & Ruizhong Zhang, 2021. "Minimum tick size and analyst coverage: Evidence from the Tick Size Pilot Program," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 666-691, March.
    4. Chung, Kee H. & Lee, Albert J. & Rösch, Dominik, 2020. "Tick size, liquidity for small and large orders, and price informativeness: Evidence from the Tick Size Pilot Program," Journal of Financial Economics, Elsevier, vol. 136(3), pages 879-899.
    5. Ibikunle, Gbenga & Aquilina, Matteo & Diaz-Rainey, Ivan & Sun, Yuxin, 2021. "City goes dark: Dark trading and adverse selection in aggregate markets," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 1-22.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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