Making cents of tick sizes: The effect of the 2016 U.S. SEC tick size pilot on limit order book liquidity

Todd Griffith and Brian S. Roseman

Journal of Banking & Finance, 2019, vol. 101, issue C, 104-121

Abstract: We use the 2016 U.S. SEC tick size pilot to examine the effects of an increase in the minimum price variation on limit order book liquidity in NASDAQ-listed stocks on the NASDAQ exchange. For treatment stocks with an average pre-pilot quoted spread less than $0.05, the tick size increase is binding and leads to a significant decrease in liquidity in the limit order book. Specifically, the implied cost to trade at and away from the best bid and offer prices increases and the limit order book becomes less resilient – the amount of time required for a deviation in liquidity to return to its long-run mean. For treatment stocks with an average pre-pilot quoted spread of at least $0.05, the tick size increase is non-binding and leads to either a slight decrease, or no change in limit order book liquidity.

Keywords: SEC tick size pilot; Limit order book; Resilience; Round-trip trade (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G18 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:101:y:2019:i:c:p:104-121

DOI: 10.1016/j.jbankfin.2019.01.017

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