Tick Size, Liquidity for Small and Large Orders, and Price Informativeness: Evidence from the Tick Size Pilot Program

Abstract

This study analyzes the effects of the Tick Size Pilot Program on liquidity, pricing efficiency, and trading activity. We show that although the execution cost of small market orders increases, the expected execution cost of large orders decreases significantly using limit order books across all U.S. exchanges. We provide plausible explanations for these results by exploring several important implications of the quote, trade, and trade-at rules implemented in the program. We also find a significant improvement in pricing efficiency, an increase in trade size, and a decrease in number of trades, but no change in analyst following and institutional ownership.

Keywords: Liquidity, Tick Size, Pilot Program, Pricing Efficiency, Bid-Ask Spread, Trading Cost

JEL Classification: G10, G14, G18