Tick Size Change and Market Quality in the U.S. Treasury Market

Abstract

This paper studies the effects of a recent tick size reduction in the U.S. Treasury securities market. We find significantly narrower bid-ask spreads, increased trading activity, improveddepth within one old tick despite lower overall market depth, and improved price efficiency.Moreover, slow traders become more competitive in liquidity provision and price improvement.Finally, high-frequency price discovery shifts to the smaller-tick cash market from the associatedfutures market, supporting the idea that a finer pricing grid allows traders to act promptly on even small information signals otherwise not profitable. Overall, we conclude that the tick sizereduction improves market quality.