Tick Size, Short Sales, and Informed Trading

Abstract

This paper shows that a large quote (trade) tick size increases (decreases) short-selling. These results are consistent with our conjecture that a large quote tick size increases fundamental information acquisition by discouraging front-running, and a large trade tick size increases trading costs. The trade-at-rule led to the migration of short sellers from off-exchanges to on-exchanges. The effectiveness of the Alternative Uptick Rule in reducing downward momentum in price increases with the trade tick size. We provide evidence that short-selling is a channel through which the quote tick size affects informed trading.

Keywords: JEL classification: G12, G14, G18 Tick size, Short sales, Alternative Uptick Rule, Front-running, Information acquisition, Informed trading

JEL Classification: G12, G14, G18