Relative Tick Size and the Trading Environment
Review of Asset Pricing Studies, Forthcoming
52 Pages Posted: 9 Jul 2014 Last revised: 18 Oct 2018
Date Written: October 10, 2018
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: Suggested Citation