Tick Size Change and Market Quality in the U.S. Treasury Market
50 Pages Posted: 23 Apr 2019 Last revised: 11 Nov 2019
Date Written: April 1, 2019
This paper studies the effects of a recent tick size reduction in the U.S. Treasury securities market. Employing difference-in-differences regressions, we find significantly narrower bid-ask spreads and increased trading activity. Market depth declines overall, but depth close to the top of the book changes little. The smaller tick size enables prices to adjust more easily to information and allows traders to quickly capture their information advantage, resulting in greater price efficiency and an information shift toward the smaller-tick cash market from the futures market. Overall, we conclude that the tick size reduction improves market quality and the information environment.
Keywords: tick size reduction, bid-ask spread, market liquidity, price efficiency, Treasury securities
JEL Classification: G12, G14, G18
Suggested Citation: Suggested Citation