Tick Size Wars: Competitive Tick Size Regimes and Trader Behavior

41 Pages Posted: 9 Nov 2016 Last revised: 7 May 2019

See all articles by Sean Foley

Sean Foley

University of Sydney Business School

Tom Meling

University of Bergen; University of Chicago

Bernt Arne Ødegaard

University of Stavanger

Date Written: April 30, 2019

Abstract

We examine the impacts of stock exchanges vying for market share by competing on tick sizes, where three pan-European exchanges unexpectedly reduced their tick sizes relative to the national listing exchanges. Their tick size competition earned them a significant market share gain, both in terms of volume, and in terms of best quotes. Trading costs fell on both the entrant exchanges and the major exchanges. The quoting behaviour of traders on the small tick exchanges is such that they undercut the large tick exchanges by one tick, traders do not compete on the small tick exchange. Our results have implications not only for optimal tick size regimes, but also for exchange price competition, including dark pools and inverted fee structures.

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

JEL Classification: G10; G20

Suggested Citation

Foley, Sean and Meling, Tom and Ødegaard, Bernt Arne, Tick Size Wars: Competitive Tick Size Regimes and Trader Behavior (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=2866943 or http://dx.doi.org/10.2139/ssrn.2866943

Sean Foley

University of Sydney Business School ( email )

Sydney
Australia

Tom Meling

University of Bergen ( email )

Fosswinckelsgt. 6
Bergen, N-5007
Norway

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

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Bernt Arne Ødegaard (Contact Author)

University of Stavanger ( email )

UiS Business School
Stavanger, NO-4036
Norway

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

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