One Size Fits All? High Frequency Trading, Tick Size Changes and the Implications for Exchanges: Market Quality and Market Structure Considerations

44 Pages Posted: 20 Mar 2017 Last revised: 21 Mar 2017

Thanos Verousis

Newcastle University Business School

Pietro Perotti

University of Bath - School of Management

Georgios Sermpinis

University of Glasgow

Date Written: March 17, 2017

Abstract

This paper offers a systematic review of the empirical literature on the implications of tick size changes for exchanges. Our focus is twofold: first, we are concerned with the market quality implications of a change in the minimum tick size. Second, we are interested in the implications of changes in the minimum tick size on market structure. We show that there is a large body of empirical literature that documents a decrease in transaction costs following a decrease in the minimum tick size. However, even though market liquidity increases, the incentive to provide market making activities decreases. We document a strong link between the minimum tick size regulations and the recent increase in High Frequency Trading (HFT) activity. A smaller tick enhances the price discovery process. However, the question of how multiple tick size regimes affect market liquidity in a fragmented market remains to be answered. Finally, we identify topics for future research; we discuss the empirical literature on the Minimum Trading Unit (MTU) and the recent calls for a minimum resting time for quotes.

Keywords: tick size, market quality, microstructure, high frequency trading, trading costs, minimum trading unit

JEL Classification: G14, G18

Suggested Citation

Verousis, Thanos and Perotti, Pietro and Sermpinis, Georgios, One Size Fits All? High Frequency Trading, Tick Size Changes and the Implications for Exchanges: Market Quality and Market Structure Considerations (March 17, 2017). Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2934848

Thanos Verousis (Contact Author)

Newcastle University Business School ( email )

United Kingdom

Pietro Perotti

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://www.bath.ac.uk/management/faculty/pietro-perotti.html

Georgios Sermpinis

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

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