Migration of Traders: Direct and Indirect Effects of the Tick Size Pilot Program

Abstract

We analyze the impacts of the SEC's tick size pilot program on the composition of stock market participants. We find overwhelming indirect effects, as the randomized feature for the controlled experiment converts the smaller tick size stocks into preferable alternatives to the larger tick size stocks. More specifically, we document the migration of traders from the larger tick size stocks to the smaller tick size stocks, and from liquidity supply to liquidity demand. Additionally, we find that the market markets increase liquidity supply for the smaller tick size stocks instead of, the larger tick size ones. The exiting migration of uninformed traders explains such shift in preference — liquidity suppliers for the larger tick size stocks are trading against better-informed traders. Our results suggest that a smaller tick size improves liquidity for the small capitalization stocks, and we highlight the importance of the indirect effects in randomized experiments.