The effects of an increase in equity tick size on stock and option transaction costs

Todd Griffith, Brian Roseman and Danjue Shang

Journal of Banking & Finance, 2020, vol. 114, issue C

Abstract: We examine the impact of the 2016 U.S. SEC Tick Size Pilot Program on transaction costs in both the equity and options markets. We find that an increase in the tick size from one-cent to five-cents increases percent bid-ask spreads for test stocks vis-à-vis control stocks; however, this increase is substantially reduced when the test stocks have actively traded options. We also find a spillover effect in transaction costs from the underlying stock market to the options market, as both percent bid-ask spreads and implied volatility spreads widen in options for test stocks versus control stocks. Lastly, we find reversal effects at the conclusion of the pilot program, as percent spreads in both the equity and options markets narrow when the tick size is reduced.

Keywords: Tick Size; Options; Transaction Costs; Bid-Ask Spreads (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300509

DOI: 10.1016/j.jbankfin.2020.105782

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