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How to Predict the Consequences of a Tick Value Change? Evidence from the Tokyo Stock Exchange Pilot Program

15 Pages Posted: 27 Jul 2015 Last revised: 28 Jul 2015

Weibing Huang

Université Paris VI Pierre et Marie Curie - Laboratoire de Probabilités et Modèles Aléatoires (LPMA)

Charles-Albert Lehalle

Capital Fund Management; CFM-Imperial College Institute of Quantitative Finance

Mathieu Rosenbaum

Université Paris VI Pierre et Marie Curie - Laboratoire de Probabilités et Modèles Aléatoires (LPMA)

Date Written: July 27, 2015

Abstract

The tick value is a crucial component of market design and is often considered the most suitable tool to mitigate the effects of high frequency trading. The goal of this paper is to demonstrate that the approach introduced in Dayri and Rosenbaum (2015) allows for an ex ante assessment of the consequences of a tick value change on the microstructure of an asset. To that purpose, we analyze the pilot program on tick value modifications started in 2014 by the Tokyo Stock Exchange in light of this methodology. We focus on forecasting the future cost of market and limit orders after a tick size change and show that our predictions are very accurate. Furthermore, for each asset involved in the pilot program, we are able to define (ex ante) an optimal tick value. This enables us to classify the stocks according to the relevance of their tick value, before and after its modification.

Keywords: Market microstructure, Tick size, Liquidity, Tokyo Stock Exchange

JEL Classification: G10, G12, G18, G20

Suggested Citation

Huang, Weibing and Lehalle, Charles-Albert and Rosenbaum, Mathieu, How to Predict the Consequences of a Tick Value Change? Evidence from the Tokyo Stock Exchange Pilot Program (July 27, 2015). Available at SSRN: https://ssrn.com/abstract=2635761 or http://dx.doi.org/10.2139/ssrn.2635761

Weibing Huang

Université Paris VI Pierre et Marie Curie - Laboratoire de Probabilités et Modèles Aléatoires (LPMA) ( email )

Couloir 16-26, 1er étage
4, Place Jussieu
Paris, 75005
France

Charles-Albert Lehalle (Contact Author)

Capital Fund Management ( email )

23/25, rue de l'Université
Paris, 75007
France

HOME PAGE: http://https://www.cfm.fr/en/

CFM-Imperial College Institute of Quantitative Finance ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Mathieu Rosenbaum

Université Paris VI Pierre et Marie Curie - Laboratoire de Probabilités et Modèles Aléatoires (LPMA) ( email )

Couloir 16-26, 1er étage
4, Place Jussieu
Paris, 75005
France

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