Tick Size, Trading Strategies, and Market Quality

Ingrid M. Werner (), Barbara Rindi (), Sabrina Buti () and Yuanji Wen ()
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Ingrid M. Werner: Fisher College of Business, The Ohio State University, Columbus, Ohio 43210
Barbara Rindi: Innocenzo Gasparini Institute for Economic Research and Centre for Applied Research on International Markets, Money Banking and Regulation (Baffi Carefin), Bocconi University, Milan 20136, Italy
Sabrina Buti: Dauphine Recherches en Management, Université Paris Dauphine-PSL, CNRS, Paris 75016, France
Yuanji Wen: UWA Business School, University of Western Australia, Crawley Western Australia 6009

Management Science, 2023, vol. 69, issue 7, 3818-3837

Abstract: We investigate the effects of a tick-size reduction on market quality in a multiperiod limit order book market. For illiquid stocks, reducing the tick size facilitates undercutting and discourages liquidity provision, resulting in deteriorating market quality but higher volume. For liquid stocks, reducing the tick size curtails queues, resulting in lower depth and volume but narrower spread. With a competing crossing network, a tick-size reduction results in worse market quality for all stocks due to migration of order flows. We empirically test our model predictions and find support for recent tick-size reductions in Japan and the United States.

Keywords: limit order markets; tick size; liquidity; market microstructure (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:7:p:3818-3837

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