Tick Size Tolls: Can a Trading Slowdown Improve Price Discovery?

Charles Lee and Edward M. Watts
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Edward M. Watts: Stanford University, Graduate School of Business, Students

Research Papers from Stanford University, Graduate School of Business

Abstract: This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SEC’s randomized “Tick Size Pilot†experiment, we show a tick size increase results in a universal decline across four commonly-used proxies for AT. This decrease in AT is accompanied by a sharp drop in abnormal volatility and volume around EAs. More importantly, we find causal evidence of increased FIA in the pre-announcement period. Specically, we show that with a larger tick size: (a) treatment firms’ pre-announcement returns better anticipate next quarter’s standardized unexpected earnings (SUEs); (b) their pre-announcement returns capture more of their total returns; (c) they experience an increase in EDGAR web trac in the days leading up to EAs; and (d) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence shows that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.

Date: 2018-10
New Economics Papers: this item is included in nep-exp and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3732

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