Subsidizing Liquidity with Wider Ticks: Evidence from the Tick Size Pilot Study

74 Pages Posted: 30 Nov 2017 Last revised: 20 Mar 2020

See all articles by Robert P. Bartlett

Robert P. Bartlett

Stanford Law School; Stanford Graduate School of Business; Rock Center for Corporate Governance

Justin McCrary

Columbia University - Law School; National Bureau of Economic Research (NBER)

Date Written: December 16, 2019

Abstract

Using data from the 2016-2018 tick size pilot study, we examine the efficacy of using wider tick sizes to subsidize market-making in small capitalization stocks. We demonstrate that realized spreads decay quickly within the initial microseconds of a trade. The effect reduces the subsidy offered by wider tick sizes, particularly for non-HFT market makers. The profit subsidy from wider tick sizes is also compromised by a significant shift in trading to “taker/maker” exchanges and to midpoint trading in non-exchange venues. The pilot’s exception for midpoint trades also accounts for the fact that nearly a third of trading remains in non-exchange venues despite the inclusion of a trade-at rule. Overall, these findings point to considerable inefficiencies in the pilot study’s goal of using wider tick sizes to subsidize liquidity provision in small capitalization stocks

Keywords: tick size pilot, high-frequency trading, market making, market structure

JEL Classification: G10, G15, G18, G23, G28, K22

Suggested Citation

Bartlett, Robert P. and McCrary, Justin, Subsidizing Liquidity with Wider Ticks: Evidence from the Tick Size Pilot Study (December 16, 2019). UC Berkeley Public Law Research Paper, Journal of Empirical Legal Studies (June 2020), Available at SSRN: https://ssrn.com/abstract=3076257 or http://dx.doi.org/10.2139/ssrn.3076257

Robert P. Bartlett (Contact Author)

Stanford Law School

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, 94305
United States

Rock Center for Corporate Governance ( email )

CA
United States

Justin McCrary

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
416
Abstract Views
2,508
Rank
137,734
PlumX Metrics