Relative Tick Size and the Trading Environment

Review of Asset Pricing Studies, Forthcoming

52 Pages Posted: 9 Jul 2014 Last revised: 18 Oct 2018

See all articles by Maureen O'Hara

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management

Gideon Saar

Cornell University - Samuel Curtis Johnson Graduate School of Management

Zhuo Zhong

University of Melbourne - Department of Finance

Date Written: October 10, 2018

Abstract

We investigate how and why relative tick sizes influence traders’ order strategies, and how this affects liquidity provision in the market. Using unique NYSE data, we find that a larger relative tick size benefits HFT market makers: they leave orders in the book longer, trade more aggressively, and have higher profit margins. In a tick-constrained (tick-unconstrained) environment, larger relative ticks result in greater (less) depth, which is consistent with greater adverse selection coming from increased undercutting of limit orders by informed HFT market makers.

Keywords: tick size, capital formation, liquidity, high-frequency trading, HFT, market makers, exchanges, market microstructure, financial regulation, SEC

JEL Classification: G10, G18

Suggested Citation

O'Hara, Maureen and Saar, Gideon and Zhong, Zhuo, Relative Tick Size and the Trading Environment (October 10, 2018). Review of Asset Pricing Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2463360 or http://dx.doi.org/10.2139/ssrn.2463360

Maureen O'Hara

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States
607-255-3645 (Phone)
607-255-5993 (Fax)

Gideon Saar (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

431 Sage Hall
Ithaca, NY 14853
United States
607-255-7484 (Phone)
607-255-5993 (Fax)

HOME PAGE: https://www.johnson.cornell.edu/Faculty-And-Research/Profile?id=gs25

Zhuo Zhong

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

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