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

50 Pages Posted: 23 Apr 2019 Last revised: 11 Nov 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 1, 2019

Abstract

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

Fleming, Michael J. and Nguyen, Giang and Ruela, Francisco, Tick Size Change and Market Quality in the U.S. Treasury Market (April 1, 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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