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 - OSU - The Ohio State University [Columbus]
Barbara Rindi: Bocconi University & IGIER
Sabrina Buti: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Yuanji Wen: UWA - The University of Western Australia

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Abstract: We investigate the effects of a tick size change on market quality by modeling a multi-period public limit order book with endogenous liquidity demand and supply. We single out four channels of transmission and show that layering and mechanical change in spread prevail for liquid, tick size constrained stocks; while undercutting prevails for illiquid stocks. We examine the robustness of our results when order flows migrate to a competing venue. We find empirical support for our predictions by analysing tick size reductions respectively for a market with low (Tokyo Stock Exchange - 2014) and one with high fragmentation (U.S. Tick Size Pilot - 2018).

Keywords: limit order markets; liquidity; market microstructure (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

Published in Management Science, 2022

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03591205

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