One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations
Thanos Verousis (),
Pietro Perotti () and
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Pietro Perotti: University of Bath
Review of Quantitative Finance and Accounting, 2018, vol. 50, issue 2, No 1, 353-392
Abstract This paper offers a systematic review of the empirical literature on the implications of tick size changes for exchanges. Our focus is twofold: first, we are concerned with the market quality implications of a change in the minimum tick size. Second, we are interested in the implications of changes in the minimum tick size on market structure. We show that there is a large body of empirical literature that documents a decrease in transaction costs following a decrease in the minimum tick size. However, even though market liquidity increases, the incentive to provide market making activities decreases. We document a strong link between the minimum tick size regulations and the recent increase in high frequency trading activity. A smaller tick enhances the price discovery process. However, the question of how multiple tick size regimes affect market liquidity in a fragmented market remains to be answered. Finally, we identify topics for future research; we discuss the empirical literature on the minimum trade unit and the recent calls for a minimum resting time for quotes.
Keywords: Tick size; Market quality; Microstructure; High frequency trading; Trading costs; Minimum trade unit (search for similar items in EconPapers)
JEL-codes: G14 G18 (search for similar items in EconPapers)
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