The Tick Size Tradeoff: Implications for Optimal Tick Sizes and Causal Inference

63 Pages Posted: 23 Dec 2022 Last revised: 10 Jan 2024

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros College of Business and Economics; U.S. Securities and Exchange Commission

Peter Dixon

U.S. Securities and Exchange Commission

Qiyu Liu

U.S. Securities and Exchange Commission

Ariel Lohr

Arizona State University (ASU) - Finance Department

Date Written: December 14, 2022

Abstract

Using the Tick Size Pilot (TSP), we provide new empirical evidence on stock-specific optimal tick sizes. Our method differs from the common practice that treats stocks whose quoted spreads are not constrained by the TSP's 5¢ tick size as a homogeneous population. Using comprehensive depth-of-book data, we show that the TSP harmed market quality for stocks with tight quoted spreads, yet improved it for stocks with wide spreads. When accounted for, this heterogeneity offers guidance for research that uses the TSP to draw causal inference in broader settings. For example, we show that the impacts of larger tick sizes on financial information production are primarily liquidity driven, whereas the extant literature attributes them solely to larger ticks deterring algorithmic trading.

Keywords: Tick size tradeoff, Market quality, Liquidity, Arbitrage, Causal inference

JEL Classification: G14

Suggested Citation

Barardehi, Yashar and Dixon, Peter and Liu, Qiyu and Lohr, Ariel, The Tick Size Tradeoff: Implications for Optimal Tick Sizes and Causal Inference (December 14, 2022). Available at SSRN: https://ssrn.com/abstract=4302058 or http://dx.doi.org/10.2139/ssrn.4302058

Yashar Barardehi

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

U.S. Securities and Exchange Commission ( email )

Peter Dixon (Contact Author)

U.S. Securities and Exchange Commission ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Qiyu Liu

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

Ariel Lohr

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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