Tick Size Wars, High Frequency Trading, and Market Quality

36 Pages Posted: 9 Nov 2016 Last revised: 22 Jun 2017

See all articles by Tom Meling

Tom Meling

University of Bergen

Bernt Arne Ødegaard

University of Stavanger

Date Written: June 20, 2017


We show that competitive stock exchanges undercut other exchanges' tick sizes to gain market share, and that this tick size competition increases investors' trading costs. Our empirical analysis is focused on an event in 2009 where three stock exchanges, Chi-X, Turquoise, BATS Europe, reduced their tick sizes for stocks with an Oslo Stock Exchange (OSE) primary listing. We find that the tick size-reducing exchanges captured market shares from the large-tick OSE. Trading costs at the OSE increased while trading costs in the competing exchanges remained unchanged. High frequency trading appears to be the main driver behind the market share and trading cost results. Our findings suggest that unregulated stock markets can produce tick sizes that are excessively small.

Keywords: Equity Trading; Limit Order Markets; Tick Sizes; High Frequency Trading

JEL Classification: G10; G20

Suggested Citation

Meling, Tom and Ødegaard, Bernt Arne, Tick Size Wars, High Frequency Trading, and Market Quality (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=2866943 or http://dx.doi.org/10.2139/ssrn.2866943

Tom Meling

University of Bergen ( email )

Fosswinckelsgt. 6
Bergen, N-5007

HOME PAGE: http://https://sites.google.com/site/tomgrmeling/

Bernt Arne Ødegaard (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, NO-4036

HOME PAGE: http://www1.uis.no/ansatt/odegaard

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