Tinkering with Ticks: Choosing Minimum Price Variation for US Equity Markets (1996 Version)

36 Pages Posted: 5 Jun 2004 Last revised: 8 Jun 2020

Date Written: February 1, 1997

Abstract

For two decades, researchers and practitioners alike have argued that constraining stock prices to eights of a dollar is unnecessarily restrictive. It has repeatedly been suggested that a smaller tick size would narrow bid-ask spreads and increase volume, and that in lower priced stocks the improvement in liquidity would be substantial. These arguments have recently gained both credence and popularity because of rigorous research work (Harris (1991, 1994)), and regulatory endorsement (SEC Market 2000 Report (1994)). However, a natural experiment using a recent change in tick size on the AMEX (from eights to sixteenths) finds little if any benefit to a smaller tick size in low priced stocks. Pervasive clustering of quotes and trades means that, in effect, market participants simply move from trading on eighths to trading on even sixteenths.

Keywords: Tick size, market microstructure, depth, volume

JEL Classification: G12, G28, C32

Suggested Citation

Crack, Timothy Falcon, Tinkering with Ticks: Choosing Minimum Price Variation for US Equity Markets (1996 Version) (February 1, 1997). Available at SSRN: https://ssrn.com/abstract=554962 or http://dx.doi.org/10.2139/ssrn.554962

Timothy Falcon Crack (Contact Author)

University of Otago ( email )

P.O. Box 56
Dunedin, Otago 9010
New Zealand

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