When Does the Tick Size Help or Harm Market Quality? Evidence from the Tick Size Pilot

57 Pages Posted: 23 Dec 2022 Last revised: 30 Jan 2023

See all articles by Yashar H. Barardehi

Yashar H. Barardehi

Chapman University - The George L. Argyros School of Business & Economics; U.S. Securities and Exchange Commission

Peter Dixon

U.S. Securities and Exchange Commission

Qiyu Liu

U.S. Securities and Exchange Commission

Ariel Lohr

Arizona State University (ASU) - Finance Department

Date Written: December 14, 2022

Abstract

Tick sizes provide a market quality tradeoff between pricing fidelity and undercutting - suggesting that the same tick size change may affect narrow and wide-spread stocks differently. Using comprehensive depth-of-book data we study the imposition and conclusion of the Tick Size Pilot (TSP) across a broad spectrum of stocks and many market quality dimensions. For TSP stocks with quoted spreads less (more) than 9c (15c) the TSP harmed (improved) market quality. Our methodology contrasts with existing TSP studies which treat all non-tick constrained stocks the same and our analysis suggests care when using the TSP as an exogenous shock to liquidity.

Keywords: Tick Size, Market Quality, Price Efficiency, Tick Size Pilot, Liquidity, Minimum Pricing Increment, Undercutting, Pennying

JEL Classification: G14

Suggested Citation

Barardehi, Yashar and Dixon, Peter and Liu, Qiyu and Lohr, Ariel, When Does the Tick Size Help or Harm Market Quality? Evidence from the Tick Size Pilot (December 14, 2022). Available at SSRN: https://ssrn.com/abstract=4302058 or http://dx.doi.org/10.2139/ssrn.4302058

Yashar Barardehi

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

HOME PAGE: http://sites.google.com/site/barardehi/

U.S. Securities and Exchange Commission ( email )

Peter Dixon (Contact Author)

U.S. Securities and Exchange Commission ( email )

450 Fifth Street, NW
Washington, DC 20549-1105
United States

Qiyu Liu

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

Ariel Lohr

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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