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

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