Tick Size and Quote Revisions on the NYSE

Abstract:     
In this paper, we analyze how tick size affects quote revisions on the NYSE and whether pre-decimalization tick sizes ($1/8 and $1/16) were binding constraints on specialists' spread- and price-quote decisions. We find that the number of quote revisions that involve changes in the spread increased dramatically after the tick-size reduction in 1997. The number of spread-quote revisions is smaller for stocks with lower prices and larger volumes during both the pre and post tick-size change periods. We interpret this result as evidence that the minimum price variation is a binding constraint on absolute spreads even after the tick-size reduction, especially for low-price and/or large-volume stocks. The number of quote revisions that involve changes in the spread (depth) is largest (smallest) during the early hour of trading, suggesting that the minimum price variation is least likely to be the binding constraint on spreads during the early hour of trading. These results suggest that decimalization is likely to further reduce price rigidity and increase price competition. Consistent with this expectation, we find a significant increase in the frequency of spread- and price-quote revisions after decimalization.

Keywords: Specialists, Spreads, Depths, Liquidity providers, Minimum price variation

JEL Classifications: G14

Working Paper Series