Tick Size Wars: Competitive Tick Size Regimes and Trader Behavior
41 Pages Posted: 9 Nov 2016 Last revised: 7 May 2019
Date Written: April 30, 2019
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: Suggested Citation