Optimal Tick Size

Giuliano Graziani and Barbara Rindi

No 688, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We consider a model of a limit order book and determine the optimal tick size set by a social planner who maximizes the welfare of market participants. In a 2-period model where only two agents arrive sequentially, the tick size is a friction that constrains investors to use discrete price grids, and as a consequence the optimal tick size is equal to zero. However, in a model with sequential arrival of more than two investors who can endogenously either take liquidity or supply liquidity by undercutting or queuing behind existing orders, the tick size is positive: it is a strategic tool a social planner uses to optimally affect the choice made by investors between liquidity demand and supply. In addition, the optimal tick size is a function both of the value of the asset and of trading volume. The policy implication of such findings is that the European tick size regime and the “Intelligent Ticks” Nasdaq proposal dominate Reg. NMS Rule 612 that formalizes the tick size regime for the U.S. markets. Using data from the U.S. and the European markets we test our model’s empirical predictions. Keywords: Limit Order Book, Tick Size, Social Planner, Undercutting, Queuing.

Date: 2023
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2023/688.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:688

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().