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

54 Pages Posted: 30 Nov 2017  

Robert P. Bartlett

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Justin McCrary

University of California, Berkeley; National Bureau of Economic Research (NBER)

Date Written: November 22, 2017

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, consistent with market makers being subject to adverse selection from asymmetrical speed among market makers. 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 (November 22, 2017). UC Berkeley Public Law Research Paper. Available at SSRN: https://ssrn.com/abstract=3076257

Robert P. Bartlett (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States
510-642-6646 (Phone)

University of California, Berkeley - Berkeley Center for Law, Business and the Economy

UC Berkeley School of Law
Berkeley, CA 94720

Justin McCrary

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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