Abstract

This study investigated the dynamics between tick size and market quality using an agent-based multiple-order-book stock-market model. Given the multiple-order-book setting, we integrated the model with small-, medium-, and large-cap stocks and conducted the analysis from both a tick-size-series and cross-sectional perspective. The simulation results showed that small-cap stocks were of the lowest quality. Further, quality was generally weakened as tick-size value increased, with expanded bid-ask spreads, elevated market volatility, and reduced market efficiency.

Highlights

  • IntroductionAs one of the fundamental transaction requirements, tick size (i.e., the minimum movement of stock price) has received considerable research attention with regard to its powerful effects on market quality [1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19]

  • Our study investigated the dynamics between tick size and market quality with small, medium, and large-cap stocks, which improves upon the limitations of prior one-stock models [27, 28]

  • This study used an agent-based multiple-order-book stock-market model to investigate the relationship between tick size and market quality

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Summary

Introduction

As one of the fundamental transaction requirements, tick size (i.e., the minimum movement of stock price) has received considerable research attention with regard to its powerful effects on market quality [1,2,3,4,5,6,7,8,9,10,11,12,13,14,15,16,17,18,19]. In light of the newly introduced tick-size policy change by the Chicago Mercantile Exchange, Martinez and Tse [9] investigated the relationship between tick-size reduction and market quality in the foreign currency futures market. Lepone and Wong [18] examined market-quality evolution with tick-size changes in the Singapore stock market They found significant drops in the bid-ask spread and order depth following the reduction of tick size, and lower-priced stocks were favored through disguised market markers with higher returns. Most of these prior studies were based on policy changes made by regulating authorities, which are extremely rare

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