Tick Size Change and Market Quality in the U.S. Treasury Market

46 Pages Posted: 23 Apr 2019

See all articles by Michael J. Fleming

Michael J. Fleming

Federal Reserve Bank of New York

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Francisco Ruela

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: April 2019

Abstract

This paper studies a recent tick size reduction in the U.S. Treasury securities market and identifies its effects on the market’s liquidity and price efficiency. Employing difference-indifference regressions, we find that the bid-ask spread narrows significantly after the change, even for large trades, and that trading volume increases. Market depth declines markedly at the inside tier and across the book, but cumulative depth close to the top of the book changes little or even increases slightly. Furthermore, the smaller tick size enables prices to adjust more easily to information and better reflect true value, resulting in greater price efficiency. Price informativeness remains largely similar before and after, suggesting that the reduction in trading costs does not result in increased information acquisition. However, there is clear evidence of an information shift from the futures market toward the smaller-tick-size cash market. Overall, we conclude that the tick size reduction improves market quality.

Keywords: tick size reduction, bid-ask spread, market liquidity, price efficiency, Treasury securities

JEL Classification: D14, G01, G12, G18

Suggested Citation

Fleming, Michael J. and Nguyen, Giang and Ruela, Francisco, Tick Size Change and Market Quality in the U.S. Treasury Market (April 2019). FRB of New York Staff Report No. 886 (2019). Available at SSRN: https://ssrn.com/abstract=3376037 or http://dx.doi.org/10.2139/ssrn.3376037

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

Francisco Ruela

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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