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Tick Size, Trading Strategies and Market Quality

Author

Listed:
  • Ingrid M. Werner

    (Fisher College of Business - OSU - The Ohio State University [Columbus])

  • Barbara Rindi

    (Bocconi University & IGIER)

  • Sabrina Buti

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Yuanji Wen

    (UWA - The University of Western Australia)

Abstract

We investigate the effects of a tick size change on market quality by modeling a multi-period public limit order book with endogenous liquidity demand and supply. We single out four channels of transmission and show that layering and mechanical change in spread prevail for liquid, tick size constrained stocks; while undercutting prevails for illiquid stocks. We examine the robustness of our results when order flows migrate to a competing venue. We find empirical support for our predictions by analysing tick size reductions respectively for a market with low (Tokyo Stock Exchange - 2014) and one with high fragmentation (U.S. Tick Size Pilot - 2018).

Suggested Citation

  • Ingrid M. Werner & Barbara Rindi & Sabrina Buti & Yuanji Wen, 2022. "Tick Size, Trading Strategies and Market Quality," Post-Print hal-03591205, HAL.
    • Handle: RePEc:hal:journl:hal-03591205
    as

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    Citations

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    Cited by:

    1. Eric M. Aldrich & Daniel Friedman, 2023. "Order Protection Through Delayed Messaging," Management Science, INFORMS, vol. 69(2), pages 774-790, February.
    2. Xiao, Xijuan & Yamamoto, Ryuichi, 2024. "Realized volatility, price informativeness, and tick size: A market microstructure approach," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 410-426.
    3. Jungjun Choi & Ming Yuan, 2023. "Matrix Completion When Missing Is Not at Random and Its Applications in Causal Panel Data Models," Papers 2308.02364, arXiv.org.

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