Tick Size, Trading Strategies and Market Quality

We investigate the effects of a tick size change on market quality by modeling a multi-period public limit order book with endogenous liquidity demand and supply. We single out four channels of transmission and show that layering and mechanical change in spread prevail for liquid, tick size constrai...

Full description

Saved in:
Bibliographic Details
Published in:Management science 2022
Main Authors: Werner, Ingrid M., Rindi, Barbara, Buti, Sabrina, Wen, Yuanji
Format: Article
Language:English
Subjects:
Business administration
Humanities and Social Sciences
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We investigate the effects of a tick size change on market quality by modeling a multi-period public limit order book with endogenous liquidity demand and supply. We single out four channels of transmission and show that layering and mechanical change in spread prevail for liquid, tick size constrained stocks; while undercutting prevails for illiquid stocks. We examine the robustness of our results when order flows migrate to a competing venue. We find empirical support for our predictions by analysing tick size reductions respectively for a market with low (Tokyo Stock Exchange - 2014) and one with high fragmentation (U.S. Tick Size Pilot - 2018).
ISSN:0025-1909
1526-5501