‘Teenies’ anyone?

We use the American Stock Exchange's May 1997 market-wide adoption of $1/16 ticks to examine several hypotheses relating to tick size reduction. Specifically, we consider volatility, other aspects of market quality, trader behavior, and specialist profits. The hypothesis that volatility is dire...

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Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2001-06, Vol.4 (3), p.231-260
Main Authors: Ronen, Tavy, Weaver, Daniel G
Format: Article
Language:English
Subjects:
Market microstructure
Tick size
Trader behavior
Volatility
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Summary:We use the American Stock Exchange's May 1997 market-wide adoption of $1/16 ticks to examine several hypotheses relating to tick size reduction. Specifically, we consider volatility, other aspects of market quality, trader behavior, and specialist profits. The hypothesis that volatility is directly related to tick size is supported by significant decreases in both daily and transitory volatility. We also find that while spreads decline, depths do not. Finally, while we find no significant changes in overall specialist profits, we develop a direct test of changes in professional traders’ activity in ‘stepping ahead of the book’, and find an increase in this behavior.
ISSN:1386-4181
1878-576X
DOI:10.1016/S1386-4181(00)00023-9