Tick Size Tolls: Can a Trading Slowdown Improve Earnings News Discovery?
61 Pages Posted: 11 Nov 2018 Last revised: 30 Oct 2019
Date Written: October 9, 2018
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 SECs randomized Tick Size Pilot experiment, we show a tick size increase results in a decline across four commonly-used AT proxies. This decrease in AT is accompanied by a sharp drop in abnormal volatility and volume around EAs. More importantly, we find increased FIA in the preannouncement period. Specifically, we show: (a) treatment firms pre-announcement returns better anticipate next quarters standardized unexpected earnings; (b) these firms experience an increase in EDGAR web traffic prior to EAs; and (c) they exhibit a drop in price synchronicity with index returns. Taken together, our evidence suggests 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, Price Informativeness, Information Acquisition, Price Discovery, Market Efficiency, Tick Size Pilot, Algorithmic Trading
JEL Classification: M40, M41, G12, G14
Suggested Citation: Suggested Citation