The Impact of Tick Sizes on Trader Behavior: Evidence from Cryptocurrency Exchanges

36 Pages Posted: 25 Jun 2018

See all articles by Anne Haubo Dyhrberg

Anne Haubo Dyhrberg

The University of Sydney - Discipline of Finance

Sean Foley

University of Sydney Business School

Jiri Svec

The University of Sydney - Discipline of Finance

Date Written: June 12, 2018

Abstract

This paper analyses the effect of a tick size on a major cryptocurrency exchange where spreads are unconstrained, assets have limited fundamental value and tick sizes are extremely small, which facilitates undercutting. Using a unique high frequency dataset and a significant increase in tick sizes on the cryptocurrency exchange Kraken, we find that undercutting decreases, leading to traders posting more and larger limit orders. Transaction costs and short-term volatility both decrease, contrary to previous findings in equity markets. We show market quality can be improved by increasing extremely small tick sizes. Our findings contribute to the optimal tick size debate, with particular implications for cryptocurrency and foreign exchange markets, where tick sizes are typically very small.

Keywords: market microstructure, tick size, trading behavior, bitcoin, cryptocurrency

JEL Classification: G14, G15, C580

Suggested Citation

Dyhrberg, Anne Haubo and Foley, Sean and Svec, Jiri, The Impact of Tick Sizes on Trader Behavior: Evidence from Cryptocurrency Exchanges (June 12, 2018). Available at SSRN: https://ssrn.com/abstract=3194932 or http://dx.doi.org/10.2139/ssrn.3194932

Anne Haubo Dyhrberg

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Sean Foley (Contact Author)

University of Sydney Business School ( email )

Sydney
Australia

Jiri Svec

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9036 6241 (Phone)

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