Charles A. Dice Center Working Paper No. 2015-04
61 Pages Posted: 22 Aug 2014 Last revised: 19 Nov 2015
Date Written: March 12, 2015
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: 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