Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the Nyse

Rodney L. White Center Working Paper No. 14-98

32 Pages Posted: 2 Jul 1998

See all articles by Michael A. Goldstein

Michael A. Goldstein

Babson College - Finance Division

Kenneth A. Kavajecz

Edgewood College; Phoenix Rising Advisory

Multiple version iconThere are 2 versions of this paper

Date Written: April 9, 1999

Abstract

We use limit order data provided by the New York Stock Exchange (NYSE) to investigate the impact of reducing the minimum tick size on the liquidity of the market. Specifically, we analyze both spreads and depths (quoted and on the limit order book) for periods before and after the NYSE's change from eighths to sixteenths. Similar to other studies, we find that quoted spreads and quoted depth declined after the change. However, we find that depth declined throughout the entire limit order book as well. The combined effect of smaller spreads and reduced cumulative depth in the limit order book has made liquidity demanders trading small orders better off while those trading large orders worse off. The benefit to the small order occurs mostly in frequently traded stocks, while small orders in infrequently traded stocks see little, if any, benefit.

Keywords: Tick size, Limit Orders, Depth, Liquidity Provision

JEL Classification: G12, G14

Suggested Citation

Goldstein, Michael A. and Kavajecz, Kenneth A., Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the Nyse (April 9, 1999). Rodney L. White Center Working Paper No. 14-98, Available at SSRN: https://ssrn.com/abstract=97748 or http://dx.doi.org/10.2139/ssrn.97748

Michael A. Goldstein (Contact Author)

Babson College - Finance Division ( email )

320 Tomasso Hall
Babson Park, MA 02457-0310
United States
781-239-4402 (Phone)
781-239-5004 (Fax)

HOME PAGE: http://faculty.babson.edu/goldstein/

Kenneth A. Kavajecz

Edgewood College ( email )

1000 Edgewood College Dr.
Madison, WI 53711
United States
6087704677 (Phone)

Phoenix Rising Advisory ( email )

519 NORTH PINCKNEY STREET
MADISON, WI 53703
United States
6087704677 (Phone)

HOME PAGE: http://www.pr-advisory.com

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