Reg NMS and Minimum-Tick Distort the Market in Opposing Directions: Theory and Market Experimental Evidence
58 Pages Posted: 14 Sep 2017 Last revised: 2 Dec 2018
Date Written: November 30, 2018
We investigate the SEC Tick Size Pilot which mandated an increase in minimum tick from 1 to 5 cents for small stocks. We predict and show that an increase in the minimum tick promotes venues operating inverted fee structures while Reg NMS promotes venues operating maker-taker fee structures. This is because the Reg NMS directs orders to the venue with the lowest displayed quotes – maker-taker venues with the highest make rebate. By contrast, the minimum tick enforces uniformity in displayed quotes and thus directs orders to the inverted venue with the highest market order rebate.
Keywords: Information Content, Toxicity, Tick Size, Exchange Access Fee, Reg NMS Rules.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation