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Tick Size: Theory and Evidence

61 Pages Posted: 22 Aug 2014 Last revised: 19 Nov 2015

Ingrid M. Werner

The Ohio State University - Fisher College of Business

Yuanji Wen

University of Western Australia - Department of Accounting and Finance

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Francesco Consonni

Bocconi University - Department of Finance

Sabrina Buti

Université Paris Dauphine - Department of Finance

Date Written: March 12, 2015

Abstract

We model a public limit order book where rational traders decide whether to demand or supply liquidity, and where liquidity builds endogenously. The model predicts that a reduction of the tick size will cause spreads and welfare to deteriorate for illiquid but improve for liquid books. We find empirical support for these predictions based on European and U.S. data. The model also generates predictions for volume, but we find less empirical support for these predictions which we attribute to opportunistic High-Frequency-Traders selectively entering the market.

Keywords: Limit Order Book, Tick Size, Market Quality, Welfare, JOBS Act

JEL Classification: G10, G12, G14, G18, G20

Suggested Citation

Werner, Ingrid M. and Wen, Yuanji and Rindi, Barbara and Consonni, Francesco and Buti, Sabrina, Tick Size: Theory and Evidence (March 12, 2015). Rotman School of Management Working Paper No. 2485069; Fisher College of Business Working Paper 2015-03-04; Charles A. Dice Center Working Paper No. 2015-04. Available at SSRN: https://ssrn.com/abstract=2485069 or http://dx.doi.org/10.2139/ssrn.2485069

Ingrid Werner

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

Yuanji Wen (Contact Author)

University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Francesco Consonni

Bocconi University - Department of Finance ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Sabrina Buti

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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