Tick Size Changes Research Articles

A Tale of Two Consequences: Intended and Unintended Outcomes of the Japan TOPIX Tick Size Changes (Presentation Slides)

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2014. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird’s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!It is said that the Universe is but the Brahma’s (Creator's) dream. Research (Effort/Struggle) can help us understand this world; Sleep (Effortlessness/Peace of Mind) can help us create our own world. A lesson from close by and down under; We need to “Do Some Yoga and Sleep Like A Koala.”

Uncertainty, Unintended Consequences and Everything Else: Study of Recent APAC Market Microstructure Events (Presentation Slides)

We look at the nature of uncertainty as it relates to people and specifically zoom into the field of finance. Since the events we consider are related to trading venues we consider the motivations for the policy decisions of exchanges. We review the microstructure methodology used for the empirical studies and see how it is suited for this age of (too much) information. Lastly we look at some key results and unintended outcomes regarding the Japan TOPIX 100 tick size changes and the Hong Kong Shanghai Connect, linking the stock exchanges in the two cities.The Topics of the Discussion: 1. The Nature of Uncertainty; 2. The Venue Menu and How to Increase Revenue; 3. Microstructure under the Microscope; 4. A Tale of Two Consequences; 5. Hong Kong Shanghai Connect/Hong Kong Beijing Disconnect.

Notes on Uncertainty, Unintended Consequences and Everything Else

The following collection of essays are linked by one theme, uncertainty. The dynamic nature of financial markets and trading, as with the rest of social sciences, where changes can be observed and decisions can be taken by participants to influence the system, means that along with better models and predictive technologies, predictions need to be continuously revised; and yet unintended consequences set in. While a detailed axiomatic approach to uncertainty and unintended consequences is postponed for another time (or perhaps another lifetime), the present assortment has the following elements:1. Dynamic Multi-Factor Bid-Offer Adjustment ModelWe develop a simple model to incorporate a feedback loop into a financial system and review other situations where such an approach might be effective. This sets the stage for the next parts by illustrating how efforts at dealing with uncertainty can be improved by feedback loops or a continuous review of the system coupled with continued corrective action. The test results show how this can be immediately relevant to a real life setting.2. David vs Goliath (You against the Markets)We develop a set of stochastic dynamic programming models that seek to separate the effect of one's actions in a financial market from the actions of other players. Such a separation brings about a reduction in complexity since participants can better plan their course of action based on a greater focus on the set of controls and states that hold greater significance for their destiny while being cognizant of the implications of the actions of the rest of the participants.3. A Tale of Two Consequences We apply the methodology from part [enu:David-vs-Goliath] to a recent event in financial markets (TOPIX 100 tick size changes on the Tokyo Stock Exchange in 2014) and illustrate how the ability to understand the impact of one's actions in isolation to the actions of others can perhaps lead to more insightful results.4. Hong Kong - Shanghai Connect/Hong Kong - Beijing Disconnect (?) This case study applies the methodology from part [enu:David-vs-Goliath] to another recent event in financial markets (the opening of the Hong Kong Shanghai Connect, connecting the stock exchanges in the two cities in 2014) and illustrates a comparative approach at studying complex systems that perhaps can be one way to overcome a seemingly unsurmountable obstacle, that is, the lack of data.5. Microstructure under the MicroscopeWe consider a measure of similarity, the Bhattacharyya distance, across distributions of variables. We illustrate a novel methodology based on the marriage between the Bhattacharyya distance and the Johnson Lindenstrauss Lemma, a technique for dimension reduction, providing us with a simple yet powerful tool that allows comparisons between data-sets representing any two distributions. The degree to which different markets or sub groups of securities have different measures of their corresponding distributions tells us the extent to which they are different. This can aid investors looking for diversification or looking for more of the same thing. We briefly discuss how this methodology lends itself to numerous Marketstructure studies and even applications outside the realm of finance/social sciences.6. Securities Lending StrategiesWe develop a valuation methodology and corresponding bidding strategies for exclusive auctions as related to the securities lending industry, a less explored yet profit laden area of financial services. This part is orthogonal to the other portions in the sense that it illustrates how the application of even simple econometric techniques can reduce uncertainty and prove to be rewarding.Each part is meant to be self contained, though at times we refer the reader to different sections for a more detailed exposition on a particular sub topic. We regret any inconvenience that this loss of continuity might bring, but hope that this makes for a more concise presentation. There is a list of references and an appendix for each part where other relevant papers, graphical aids, results of statistical tests and proofs are given and linked into the narrative.

A Tale of Two Consequences

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2104. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird`s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!

The Impact of a Premium‐Based Tick Size on Equity Option Liquidity

AbstractOn June 2, 2009, NYSE LIFFE Amsterdam reduced the tick size for options trading at prices below € 0.20 from € 0.05 to € 0.01 and on April 1, 2010, the exchange increased the price threshold to € 0.50. We study the effect of that tick size reduction on the liquidity of individual equity options. In this respect, this study is uniquely positioned in the options context where moneyness is a clear additional factor in the implementation of the tick size changes. We show that, in general, quoted and traded option liquidity increased but at a rate decreasing with option moneyness. Real costs fell more for the lower priced contracts. Importantly, we show that the ability of the market to absorb larger trades has potentially diminished after the change in the tick size. We document a substantial increase in quote revisions which implies an increase in price competition and, as a result, an improvement in market quality. Finally, the decrease in the tick size led to an increase in hedging activity using deep‐out‐of‐the‐money puts. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:397–417, 2016

How to Predict the Consequences of a Tick Value Change? Evidence from the Tokyo Stock Exchange Pilot Program

The tick value is a crucial component of market design and is often considered the most suitable tool to mitigate the effects of high frequency trading. The goal of this paper is to demonstrate that the approach introduced in Dayri and Rosenbaum (2015) allows for an ex ante assessment of the consequences of a tick value change on the microstructure of an asset. To that purpose, we analyze the pilot program on tick value modifications started in 2014 by the Tokyo Stock Exchange in light of this methodology. We focus on forecasting the future cost of market and limit orders after a tick size change and show that our predictions are very accurate. Furthermore, for each asset involved in the pilot program, we are able to define (ex ante) an optimal tick value. This enables us to classify the stocks according to the relevance of their tick value, before and after its modification.

A Tale of Two Consequences

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2014. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird’s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!

From cents to half-cents and its liquidity impact

Purpose – The purpose of this paper is to examine the impact on stock liquidity following the reduction of minimum tick size from $0.01 to $0.005 for a selection of dual-listed and property stocks on the New Zealand Exchange (NZX) during 2011. Design/methodology/approach – Various liquidity measures were examined six months either side of the change in minimum tick size for the eligible stocks and these were compared to a sample of stocks matched on similar liquidity characteristics. Liquidity measures examined in the paper include quoted and effective spread, volume, depth and binding-constraint probability. Findings – After controlling for firms matched on similar pre-period liquidity characteristics both spread and depth decline significantly. Evidence that small firms experience significant declines in trading activity was also found, and while firms with higher binding-constraints probability have greater declines in spread, their decline in depth is greater still. Research limitations/implications – The small sample of 17 stocks eligible for the $0.005 minimum tick size potentially impacts on the strength of the statistical analysis. As such, it is harder to detect statistically significant changes in liquidity. Practical implications – These findings have important implications for policymakers as the hoped for benefits of smaller tick increments may only be fully realized by larger more active stocks. Originality/value – The paper examines the impact of a change in minimum tick size on eligible New Zealand Exchange (NZX) stocks to determine whether it meet the stated NZX goal of boosting liquidity.

Stock Liquidity and Tax Avoidance: Evidence from Natural Experiments

This study establishes a causal link between stock liquidity and tax avoidance. We find that high liquidity reduces firms’ tax-avoiding activities. Our analysis suggests that an interquartile improvement in stock liquidity increases the effective tax rate by 6%, a sizable impact compared to the sample average rate of 21%. To address endogeneity challenges, we exploit the variation in stock liquidity introduced by two exogenous shocks (tick size changes and stock splits) and conduct an instrumental variable analysis. We then examine two possible mechanisms through which high liquidity curbs tax avoidance — namely, heightened takeover exposure and improved contracting roles of equity-based compensation. Amid the global trend of cutting statutory tax rates, deterring extensive tax avoidance has become increasingly important in tackling government budget deficits. Our findings suggest that when policymakers consider liquidity-altering regulations, they should not overlook high liquidity’s beneficial effect on reducing tax avoidance.

The diversity of high-frequency traders

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion's share of HFT trading volume (63–72%) and limit order traffic (81–86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.

Tick Size, Microstructure Noise, Informed Trading and Volatility Inversion Effects on Price Discovery in Option Markets: Theory and Empirical Evidence

We document both theoretically and empirically a major dependence in both the Information Shares (IS) and Component Shares (CS) approaches to the estimation of the price discovery metrics on the errors arising out of the inversion method of the option value to find the implied stock price, as well as on the statistical technique used to estimate these metrics. We then introduce accurate inversion methods that result in a major increase in the information shares of option markets for both IS and CS metrics compared to the dominant Lagged Implied Volatility inversion method. We apply these insights by examining the impact of the tick size reduction introduced by the CBOE in 2007 in its second pilot program on the simultaneous price discovery process in the markets for options and their underlying securities. In all cases we document a major impact of the tick size reduction in the option market that increases the option market information shares for all metrics, all statistical techniques used for their estimation, and all inversion methods. In addition, we document systematic differences in option market information shares between equities and exchange traded funds both before and after the tick size change, and we present strong event-type empirical evidence of informed trading in the equity option market after the tick size change, with extreme values of the IS and CS metrics in that market producing similar abnormal underlying asset returns.

The Diversity of High Frequency Traders

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion’s share of HFT trading volume (65-71%) and limit order traffic (81-86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.

Impact of the Change in Tick Size on Transaction Costs and Liquidity: An Empirical Investigation of the Taiwan Stock Exchange*

The minimum price variation on the Taiwan Stock Exchange reduced for most price categories on March 1, 2005. The present paper simultaneously examines the institutional and endogenous impacts of tick size changes on transaction costs, market liquidity, and trading activity. The empirical evidence suggests that following a reduction in tick size, uniform declines are discernible in transaction costs and market liquidity. In particular, those stocks with a larger relative tick size reduction, higher trading volume, and higher order handling cost components have greater reductions in spread and market depth. Moreover, endogenous tick size reductions have an adverse effect on the trading activity for low-price stocks, due to the relative disadvantage in explicit transaction costs. Finally, the present study observes a general diminution in trade size resulting from a reduction in tick size in the Taiwan Stock Exchange. This study attributes plausible rationales to the fact that after tick size reductions, informed traders employ a smaller trade size to hide private information, or front-runners place a smaller trade size to avoid market turbulence.

Tick size change on the Stock Exchange of Thailand

This paper explores the impact of an exogenous tick size reduction on bid-ask spreads, depths, and trading volume on the Stock Exchange of Thailand (SET). On November 5, 2001, the SET implemented a tick size reduction on stocks priced below THB 25. Even though trading on SET is largely dominated by retail investors, the tick reduction produces similar empirical results found in markets where institutional investors are more dominant. Tick reduction on the SET is associated with declines in spreads, and quoted and accumulated market depths. The study finds no significant change in trading volume due to the reduction.

TICK SIZE DAN KUALITAS PASAR DI BURSA EFEK JAKARTA

The purpose of this study is to analyze the impact of a tick size change announcement to capital market quality using data from firms listed in Bursa Effect Jakarta. Database classified firms by stock volume level and price level. Generally, there is no evidence to prove that a tick size change announcement have an influence to capital market quality, but for special case we can prove that a tick size change announcement tend to influence capital market quality: i.e for firm that have lower price stock, the reducing tick size announcement will decrease capital market quality and from regression result find that reducing tick size will also decrease capital market quality.Keywords: Announcements, tick size, capital market quality

Tick size change and liquidity provision for Japanese stock trading near ¥1000

Bessembinder [Bessembinder, H., 2000. Tick size, spreads, and liquidity: an analysis of NASDAQ securities trading near ten dollars, Journal of Financial Intermediation 9, 213–239] examines the effect of tick size changes from US$ 1/32 to US$ 1/8 on NASDAQ stocks when the stock prices pass US$ 10. In contrast with NASDAQ, the Tokyo Stock Exchange (TSE) strictly enforces the price and time precedence rule. The TSE is also one of the largest limit-order markets using a tick size that is a step function of share price. The threshold, at ¥1000, is the most important among several other price levels. The minimum tick size increases from ¥1 to ¥10 when stock prices rise from below ¥1000 to above ¥1000. This large change in tick size and its effects on market quality have interested researchers for a long time [Amihud, Y., Mendelson, H. 1991. Volatility, efficiency and trading: evidence from the Japanese stock market, Journal of Finance 46, 1765–1789; Harris, L., 1994. Minimum price variations, discrete bid-ask spreads, and quotation sizes, Review of Financial Studies 7, 149–178], but they have never been examined. This study considers the impact of the change in minimum tick size on liquidity provisions as TSE stock prices cross the ¥1000 threshold. The empirical results provide some new insights regarding the effects of endogenous tick size changes.

The Role of Transaction Costs for Financial Volatility: Evidence from the Paris Bourse

This paper analyzes the causal linkage between transaction costs and financial volatility under two methodological improvements over the existing literature. First, we use panel data in which exogenous transaction cost differences in the French stock market are induced by price level dependent minimum price variation rules (tick size rules). Unlike in previous studies based on one-time regulatory tick size changes (like the U.S. decimalization), we can separately identify and control for marketwide volatility changes. Second, we avoid the pitfalls of biased volatility measurement across regimes by using the range as a tick size robust volatility metric. Panel regressions controlling for marketwide volatility effects show at high levels of statistical significance that the hourly range volatility of individual stocks increases by more than 30% for a 20% exogenous increase in transaction costs due to tick size variations in the French trading system. In the light of this evidence, higher transaction costs in general, and security transaction taxes in particular, should be considered as volatility increasing. (JEL: F3, G1, G14)

Tick size change and liquidity provision on the Tokyo Stock Exchange

The Tokyo Stock Exchange (TSE) introduced a change in its minimum tick sizes on April 13, 1998, for stocks traded at certain price ranges. We investigate the liquidity and market quality of the stocks affected by the tick size change, using a unique and comprehensive tick-by-tick data. We find that the quoted spread (effective spread) declined significantly by 20 to 50 percent (by 24 to 60 percent) after the tick size change. Reductions in spread are greater for firms with greater tick size reductions, greater trading activity, and higher transitory component in the bid–ask spread. Although investors are more aggressive in posting quotes, there is no definite evidence of an increase in trading volume. Overall, our evidence is consistent with the hypothesis that the minimum tick size creates economic rents for liquidity providers, which is lowered upon tick size reduction. J. Japanese Int. Economies 21 (2) (2007) 173–194.

So who gains from a small tick size?

We investigate the relation between price discreteness and the number of dealers in a dealer market. We present a model featuring a finite number of dealers competing in prices for supplying liquidity to a forthcoming market order. We find that a decrease in tick size benefits dealers and tends to hurt investors when the number of dealers for a stock is small. In contrast, a decrease in tick size hurts dealers and benefits investors when the number of dealers is large. This result yields several new empirical implications relating a change in tick size to entry and exit of dealers, order aggressiveness and transaction rates.

Tick size and spreads: The case of Nasdaq’s decimalization

Recent studies by the Securities and Exchange Commission (SEC) and by academics have provided empirical evidence that Nasdaq trade execution costs are still higher than, for instance, on the NYSE. Introducing decimal pricing is one concrete plan to enhance Nasdaq’s competitiveness. However, effects of tick size changes are difficult to predict. For that reason models have been required for quite a while. Capital market synergetics is appropriate to investigate the effects of market microstructure changes. In this paper, we examine the impact of a variation in Nasdaq’s minimum price increment on quoted spreads. First, our findings confirm the numerical value of the decline in the average quoted spread in 1997 as an immediate effect of reducing the tick size from $1/8 to $1/16. This strongly affirms the reliability of our calculation results. Second, by applying the same research design again, we investigate the impact of a further reduction in the tick size to $1/100. No such study is available at the moment. The expected changes in the average quoted spreads due to the reduction in the tick size from $1/16 to $1/100, the change through decimalization, range from an increase of 2.82% to a decrease of 15.51%. Derived by applying the same method again, the figures embody a reliable forecast of the real effects and are therefore of eminent importance to academics and to practitioners as well.