Tick Size and Market Quality

Abstract

All of the US stock markets have reduced their respective minimum tick sizes. Since the three major US markets, the American Stock Exchange (AMEX), New York Stock Exchange (NYSE), and Nasdaq, all have different order-priority systems, the impact of the tick-size reduction on spread width, as well as other aspects of market quality, can differ across the markets. Given that previous research has established a link between spread width and a firm's cost of capital, this differing impact is important to firms in their exchange listing decision. This study examines changes in market quality across two different priority systems, price-time and price-sharing, following a reduction in the minimum tick size by the Toronto Stock Exchange (TSE) on April 15, 1996. We find that, following the reduction in minimum tick size on the TSE, spreads generally narrow and quoted depths decline for both priority systems. (Depth is defined as the total number of shares offered or sought at a price.) The effect is greatest on low-priced, high-volume stocks.