Tick Size, Trading Strategies and Market Quality

Ingrid M. Werner, Yuanji Wen, Barbara Rindi and Sabrina Buti
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Ingrid M. Werner: The Ohio State University - Fisher College of Business
Yuanji Wen: The University of Western Australia - Department of Accounting and Finance
Barbara Rindi: Bocconi University and IGIER and Baffi Carefin
Sabrina Buti: Université Paris Dauphine - Department of Finance

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We model a public limit order book (PLB) with rational investors choosing to supply or demand liquidity. Following a reduction in the tick size the effects on PLB’s market quality depend on the liquidity of the stocks. Spread improves for tick-constrained stocks and deteriorates for unconstrained stocks; inside depth decreases in particular for constrained stocks, and volume increases for unconstrained stocks. The model also shows how results change when competition from a crossing network generates order flow migration. We find empirical support for these predictions by exploiting the 2014 reduction of tick size at the Tokyo Stock Exchange.

JEL-codes: D40 G10 G20 G24 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-fmk and nep-mst
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-03

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