Tick Size, Trading Strategies and Market Quality

60 Pages Posted: 8 Feb 2019 Last revised: 14 Apr 2021

See all articles by Ingrid M. Werner

Ingrid M. Werner

The Ohio State University - Fisher College of Business; CEPR

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Sabrina Buti

Université Paris Dauphine - Department of Finance

Date Written: April 14, 2021

Abstract

We investigate the effects of a tick size change on market quality by modeling a multi-period public limit order book with endogenous liquidity demand and supply. We single out four channels of transmission and show that layering and mechanical change in spread prevail for liquid, tick size constrained stocks; while undercutting prevails for illiquid stocks. We examine the robustness of our results when order flows migrate to a competing venue. We find empirical support for our predictions by analysing tick size reductions respectively for a market with low (Tokyo Stock Exchange - 2014) and one with high fragmentation (U.S. Tick Size Pilot - 2018).

Keywords: limit order markets, tick size, liquidity, market microstructure

JEL Classification: G10, G20, G24, D40

Suggested Citation

Werner, Ingrid M. and Wen, Yuanji and Rindi, Barbara and Buti, Sabrina, Tick Size, Trading Strategies and Market Quality (April 14, 2021). Fisher College of Business Working Paper No. 2019-03-03, Charles A. Dice Center Working Paper No. 2019-3, Université Paris-Dauphine Research Paper No. 3330807, Available at SSRN: https://ssrn.com/abstract=3330807 or http://dx.doi.org/10.2139/ssrn.3330807

Ingrid M. Werner (Contact Author)

The Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-6460 (Phone)
614-292-2418 (Fax)

CEPR ( email )

London
United Kingdom

Yuanji Wen

The University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Sabrina Buti

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

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