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Tick Size, Trading Strategies and Market Quality

Author

Listed:
  • Werner, Ingrid M.

    (The Ohio State University - Fisher College of Business)

  • Wen, Yuanji

    (The University of Western Australia - Department of Accounting and Finance)

  • Rindi, Barbara

    (Bocconi University and IGIER and Baffi Carefin)

  • Buti, Sabrina

    (Université Paris Dauphine - Department of Finance)

Abstract

We model a public limit order book (PLB) with rational investors choosing to supply or demand liquidity. Following a reduction in the tick size the effects on PLB’s market quality depend on the liquidity of the stocks. Spread improves for tick-constrained stocks and deteriorates for unconstrained stocks; inside depth decreases in particular for constrained stocks, and volume increases for unconstrained stocks. The model also shows how results change when competition from a crossing network generates order flow migration. We find empirical support for these predictions by exploiting the 2014 reduction of tick size at the Tokyo Stock Exchange.

Suggested Citation

  • Werner, Ingrid M. & Wen, Yuanji & Rindi, Barbara & Buti, Sabrina, 2019. "Tick Size, Trading Strategies and Market Quality," Working Paper Series 2019-03, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    • Handle: RePEc:ecl:ohidic:2019-03
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    Cited by:

    1. Jose S. Penalva & Mikel Tapia, 2021. "Heterogeneity and Competition in Fragmented Markets: Fees Vs Speed," Applied Mathematical Finance, Taylor & Francis Journals, vol. 28(2), pages 143-177, March.
    2. Zhu, Hongyu & Yamamoto, Ryuichi, 2022. "Order submission, information asymmetry, and tick size," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    3. Tom Grimstvedt Meling, 2021. "Anonymous Trading in Equities," Journal of Finance, American Finance Association, vol. 76(2), pages 707-754, April.
    4. Barardehi, Yashar H. & Bernhardt, Dan & Da, Zhi & Mitch Warachka, Mitch, 2022. "Institutional Liquidity Demand and the Internalization of Retail Order Flow : The Tail Does Not Wag the Dog," The Warwick Economics Research Paper Series (TWERPS) 1394, University of Warwick, Department of Economics.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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