True Liquidity and Fundamental Prices: US Tick Size Pilot

Abstract

We develop a big-data methodology to estimate fundamental prices and true liquidity measures, explicitly considering the rounding specification due to the minimum tick size. Evaluation of the tick size pilot (TSP), which increased the tick size for some randomly chosen stocks, requires the impact of rounding. Our true liquidity measures capture the TSP-driven decreased inventory costs of market-makers, whereas traditional measures without the rounding adjustment cannot. We nd that the TSP increases market-maker pro ts, but does not improve liquidity and price efficiency. This result contrasts existing empirical studies but is consistent with recent theoretical studies that account for rounding.