The Impacts of Tick Size Reduction in a Market with Multiple Tick Sizes

39 Pages Posted: 12 Jul 2015 Last revised: 8 Oct 2016

See all articles by Hung-Kun Chen

Hung-Kun Chen

Tamkang University - Department of Banking and Finance

Wen-liang Hsieh

National Chiao-Tung University - Graduate Institute of Finance

Date Written: May 25, 2013

Abstract

We analyze the impact of tick size reduction on market quality, placing particular focus on whether a multiple tick rule helps to mitigate the impact of a tick rule size reduction in purely order-driven markets. Using a novel dataset covering an entire limit order book, our results suggest that the tick size reduction resulted in substantial declines in effective spread, quote depth, and market depth throughout the limit order book, whereas no significant effects on either trading volume or volatility are discernible. The multiple tick schedule does not eliminate divergence in the market quality for stocks in the same tick size group or across tick size groups. Within the same tick size group, spread and depth are reduced more for those stocks with lower prices, larger capitalization levels, and higher trading frequency. Across tick size groups, the impact of the tick size reduction is found to be stronger for groups where the original tick size was more of a binding constraint and for those groups which experienced a larger (relative) tick size reduction. Overall, our results suggest that a smaller tick size has reduced transaction costs for small trades yet impaired the provision of liquidity, particularly for large trades in high capitalization and more frequently-traded stocks. As a result, the net benefit of the new tick size schedule cannot be confirmed with certainty.

Keywords: Tick Size, Bid-ask Spread, Quote Depth, Entire Limit Order Book

JEL Classification: G18, G198

Suggested Citation

Chen, Hung-Kun and Hsieh, Wen-liang, The Impacts of Tick Size Reduction in a Market with Multiple Tick Sizes (May 25, 2013). Available at SSRN: https://ssrn.com/abstract=2629524 or http://dx.doi.org/10.2139/ssrn.2629524

Hung-Kun Chen

Tamkang University - Department of Banking and Finance ( email )

No.151, Yingzhuan Rd. Tamsui Dist.
Taiwan, New Taipei 25137
Taiwan
+886-922140963 (Phone)

Wen-liang Hsieh (Contact Author)

National Chiao-Tung University - Graduate Institute of Finance ( email )

Hsinchu 300
Taiwan

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