Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery?

61 Pages Posted: 11 Nov 2018 Last revised: 14 May 2019

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Edward M. Watts

Stanford University, Graduate School of Business, Students

Date Written: October 9, 2018

Abstract

This study examines how an increase in tick size affects algorithmic trading (AT), fundamental information acquisition (FIA), and the price discovery process around earnings announcements (EAs). Leveraging the SEC’s randomized “Tick Size Pilot” experiment, we show a tick size increase results in a universal decline across four commonly-used proxies for AT. This decrease in AT is accompanied by a sharp drop in abnormal volatility and volume around EAs. More importantly, we find causal evidence of increased FIA in the pre-announcement period. Specifically, we show that with a larger tick size: (a) treatment firms’ pre-announcement returns better anticipate next quarter’s standardized unexpected earnings (SUEs); (b) their pre-announcement returns capture more of their total returns; (c) they experience an increase in EDGAR web traffic in the days leading up to EAs; and (d) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence shows that while an increase in tick size reduces AT and abnormal market reaction after EAs, it also increases FIA activities prior to EAs.

Keywords: Earnings Announcements, Information Acquisition, Market Efficiency, Tick Size Pilot, Algorithmic Trading

JEL Classification: M40, M41, G12, G14

Suggested Citation

Lee, Charles M.C. and Watts, Edward, Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery? (October 9, 2018). Stanford University Graduate School of Business Research Paper No. 19-1. Available at SSRN: https://ssrn.com/abstract=3263778 or http://dx.doi.org/10.2139/ssrn.3263778

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Edward Watts

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

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