Tick Size Reduction Research Articles

Option trading and equity price efficiency

This paper presents evidence that the reduction in option tick size enhances equity price efficiency. To address the endogeneity issue, I employ an exogenous event, namely the Penny Pilot program. The findings indicate that option trading mitigates equity misvaluation, reduces price delay, accelerates the incorporation of future earnings into equity prices, and eliminates the well-known Post-Earnings Announcement Drift (PEAD). The pilot program significantly increases trading volume and reduces trading costs during the pilot period. Furthermore, the effect of options-to-stock volume on future stock returns is stronger in firms with high short-sale costs. This evidence is consistent with the hypothesis that informed trading boosts trading volume in the options market and integrates information from the options market into equity prices, thereby enhancing equity price efficiency.

What Makes HFTs Tick? Tick Size Changes and Information Advantage in a Market with Fast and Slow Traders

We study the impact of two changes in the minimum tick size, a reduction and a subsequent increase, on the trading behavior of fast and slow traders in the spot foreign exchange market. We find that the most notable impact of the tick size reduction is a substantial increase in the liquidity demand of high-frequency traders (HFTs) and not the decrease in their liquidity provision discussed by prior literature. We show that this change in behavior is linked to the higher frequency of price signals that arises with the smaller tick size and to the ability of fast traders to profit from it, often at the detriment of slower traders. Following the tick size decrease and the increase in liquidity demand by HFTs in the spot market, the role of the spot market in price discovery drops relative to that of the futures market. We discuss these findings in the context of the impact of HFTs on the information content of financial markets. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.02935 .

The lower the better? Revisiting minimum tick size

ABSTRACT We analyse the impact on liquidity of a reduction of the minimum tick size to sub-cent levels at the Vienna Stock Exchange. We find no effect, even after controlling for the extent to which stocks were constrained by the pre-change tick size. Our results imply that regulator-imposed lower bounds on the tick size are not necessarily harmful, and they fail to confirm the existence of a u-shaped relation between tick size and illiquidity as predicted by theoretical models.

한·중 간 배송 대행 업체의 물류 서비스 품질이 고객 만족도에 미치는 영향 연구

Purpose - The purpose of this study is to find through empirical analysis how the quality of the logistics service of delivery agencies between Korea and China affects customer satisfaction and the perceived value of consumers, and how perceived value as a mediating factor affects customer satisfaction.
 Design/Methodology/Approach - In this study, data were collected through a questionnaire based on previous studies. Descriptive statistical analysis, reliability analysis, validity analysis, correlation, and other statistical analysis were performed on the sample data collected from the questionnaire using SPSS 26.0 and AMOS 26.0.
 Findings - It was empirically analyzed that the quality of logistics service of delivery agencies have a significant effect on customer satisfaction. Perceived value was empirically analyzed to play a mediating role in the influence relationship between the logistics services of delivery agencies and customer satisfaction.
 Research Implications - The tick size reduction was consistent and supports previous research from different countries. The bid-ask spread, ask depth, and bid depth significantly decreased, the trading volume had a tendency to increase as well, although it was not significant. For IDX and Bapepam, additional information related to changes that occurred as a result of the implementation of the new policy in stock trading was noted. Investors can use the information from this study to make investment decisions. This study was able to obtain 169 samples during 90 day observation period. Furthermore, this study used multiple statistic methods that give robust results to accept or reject the hypotheses.

Realized volatility, price informativeness, and tick size: A market microstructure approach

This study examines the effects of tick size reduction on price volatility and microstructure noise terms embedded in stock prices. Comparing the realized variances and microstructure noise autocovariance before and after the tick size reduction and stock split, it is found that a smaller tick size induces a significant decline in price fluctuations at a 1-min frequency. Regressing the realized variances and microstructure noise autocovariance against trading activities, it is found that the decrease in the execution of large trades due to tick size reduction is primarily accountable for the shrinkage in price volatility. This effect exceeds the increase in the number of small trades that introduce higher price volatility. A less tick-constrained environment encourages order splitting, alleviates order clustering, weakens microstructure noise contamination, lowers its role in price variation, and thus improves price informativeness.

Tick size, liquid stocks and market quality: Evidence from a natural experiment in a unique setting

We study the causal impacts of a tick size reduction policy in highly liquid stocks, exploiting a unique experiment in Borsa Istanbul leading to substantial exogenous variation in the tick size. Adapting a differences-in-differences strategy with a novel limit order and trade book data with intraday calculations, we find evidence that the tick size reduction improves market quality for the liquid stocks by significantly lowering quoted, effective, and realized spread yet reducing the depth at the best bid offer and aggregate depth. Moreover, results indicate a lower price impact for the treated stocks while there is no significant impact on trading volume, however, the number of trades increases but trade and order sizes get smaller significantly. Estimates show null effects on the submission of market orders, volatility, and returns. Our study departs from the existing literature with no dark pool trading and internalization of orders in the Turkish Stock Markets.

Tick Size, Competition for Liquidity Provision, and Price Discovery: Evidence from the U.S. Treasury Market

This paper studies how a tick size change affects market quality, price discovery, and the competition for liquidity provision by dealers and high-frequency trading firms (HFTs) in the U.S. Treasury market. Using difference-in-differences regressions around the November 19, 2018, tick size reduction in the 2-year Treasury note and a similar change in the 2-year futures eight weeks later, we find significantly improved market quality. Moreover, dealers become more competitive in liquidity provision and price improvement, consistent with the hypothesis that HFTs find liquidity provision less profitable in the smaller tick size environment. Last, we find a significant shift in short-run price discovery toward the cash market, which then reverses when the futures market tick size is reduced, suggesting that the finer pricing grid in the cash market allows traders to act on small information signals that are not profitable to exploit in the larger-tick futures market. Our findings suggest that reducing the tick size in tick-constrained and highly liquid markets like the Treasury market is on balance beneficial. This paper was accepted by Bruno Biais, finance. Funding: F. Ruela acknowledges support from the National Science Foundation Graduate Research Fellowship Program [Grant DGE-1746045]. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the National Science Foundation. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4663 .

Tick Size, Trading Strategies, and Market Quality

We investigate the effects of a tick-size reduction on market quality in a multiperiod limit order book market. For illiquid stocks, reducing the tick size facilitates undercutting and discourages liquidity provision, resulting in deteriorating market quality but higher volume. For liquid stocks, reducing the tick size curtails queues, resulting in lower depth and volume but narrower spread. With a competing crossing network, a tick-size reduction results in worse market quality for all stocks due to migration of order flows. We empirically test our model predictions and find support for recent tick-size reductions in Japan and the United States. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4502 .

Order submission, information asymmetry, and tick size

Our study investigates traders' order submission strategies with varying market conditions under information asymmetry. It examines how a reduction in tick size affects informed traders' order choices in response to changes in market conditions and subsequently influences the information content of the limit order book on the Tokyo Stock Exchange. We quantify the permanent price impact of orders with different levels of aggressiveness to measure the information content of different kinds of orders before and after a reduction in tick size. The results show that market orders and limit orders placed within or at the best bid and offer (BBO) are more informative than limit orders placed behind the BBO. Moreover, when the quoted spread is wider (narrower) and volatility is low (high), the information content of limit orders placed within or at the BBO is larger (smaller) than market orders, providing evidence that informed traders' order choice on market orders or limit orders is a trade-off between transaction costs and adverse selection costs. We further observe that the information content increases in market orders but decreases in limit orders placed within or at the BBO when the quoted spread becomes narrower and volatility changes from low to high after tick size reduction. This suggests that informed traders tend to shift from limit orders to market orders as transaction costs decrease and adverse selection costs increase, transactions become more informative, which reduces the information content of the limit order book.

Does stock market liquidity affect dividends?

Using two exogenous shocks, we examine the causal impact of stock liquidity on firms' dividend policy. Both the first shock, the reduction of the minimum tick size from 1/16 to decimals in the US, and the second shock, the mandatory conversion of non-traded stocks to traded stocks in China, changed the liquidity of affected stocks. We find, in both experiments, that increased stocks liquidity results in a significant reduction in dividends. Our empirical design enables us to control for asset liquidity, investment changes, and other omitted factors that might affect firms' dividend policy. We conclude that when firms set dividend policies, satisfying investors' liquidity needs is a significant factor.

Timing of tick size reduction: Threshold and smooth transition model analysis

“Tick size” is the minimum subdivision of price at which investors can buy or sell an asset in a financial market. Tick size is reduced to improve market quality and liquidity. This study analyzes the volume dimension of liquidity—specifically, trading volume—to determine the time of impact of the 2014 tick size reduction policy, implemented in two phases (P1 and P2) by the Tokyo Stock Exchange. Threshold autoregressive (TAR) and logistic smooth transition autoregressive (LSTAR) models are used to estimate this time of impact. The results show that the use of the TAR model changed the trading volumes for P1 and P2 on December 13, 2013, and June 30, 2014, respectively. With the addition of the LSTAR model, the trading volumes of P1 and P2 changed on December 16, 2013, and September 3, 2014, respectively. These results suggest that empirical studies on tick size reduction need longer interruptions.

Measuring institutional trading costs and the implications for finance research: The case of tick size reductions

Using proprietary institutional trade data, we construct a price impact measure that represents the costs faced by institutional investors. We show that many widely used liquidity measures do not adequately capture institutional trading costs. We then find that institutional trading costs are not dramatically impacted by decimalization, casting doubt on the widely used identification strategy that employs decimalization as an exogenous shock to liquidity, particularly institutional liquidity. Indeed, we find that conclusions from prior research are significantly altered when we measure liquidity using institutional trading data.

Price discovery, order submission, and tick size during preopen period

Using limit order book data, this study investigates the effects of minimum tick size reduction on price discovery and order submission strategies during the preopen call auction period in the Tokyo Stock Exchange. Studying the largest stocks' changes before and after the tick size reduction, our findings suggest that price discovery becomes more efficient when a smaller tick size is employed. A reduction in tick size induces a decrease in market depth and spread and enhances the speed of price discovery by encouraging more aggressive order to be placed and providing investors a better learning and communicating environment to incorporate information into order decisions. Our results demonstrate that, although orders are not matched and no transaction occurs during the preopen period, the order placement at these moments is neither necessarily noisy nor completely manipulative; factors that impact the investor's order choice during the normal trading period also work in this period.

Stock market illiquidity, bargaining power and the cost of borrowing

Abstract We show that firms with illiquid stock have higher syndicated loan spreads. This result is invariant to measurement of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and time fixed effects. It also holds using a matched difference-in-differences estimator, at an exogenous reduction in the minimum tick size of major United States exchanges, and using a two-stage least squares estimator. Stock illiquidity is shown to increase spreads more when a lead lender has a high market share or a borrower has a low credit rating. It increases spreads less when a borrower has public rated debt and it diminishes the benefit to the loan recipient of a lending relationship. Measurements of stock price informativeness and firm-level governance do not affect the stock illiquidity and loan spread relation. A rationale for these findings is that stock illiquidity impairs the bargaining power of corporate borrowers, in negotiating a loan rate, as it raises the cost of alternatively raising funds by issuing equity.

Limit order submission risks, order choice, and tick size

We propose empirical measures of non-execution and picking-off risks and demonstrate that a minimum tick size reduction decreases non-execution risk but increases picking-off risk on the Tokyo Stock Exchange. This results in a higher tendency to submit aggressive orders for some stocks and cancel limit orders for the others. We conclude that our two limit order submission risks are crucial for understanding the results of past empirical studies that examine how minimum tick size reduction impacts limit order submission risks and why traders become aggressive in their order choice. We further show that our proposed measures of non-execution and picking-off risks are better variables than are proxies for the two risks such as spread (which have been suggested by previous empirical studies) or transaction cost measured by the relative tick size when analyzing the determination of the order choice and/or evaluating a minimum tick size reduction policy.

What makes HFTs tick?

We study the impact of two changes in the `tick size, a reduction and a subsequent increase, on the trading behavior of fast and slow traders in the spot foreign exchange market. We find that the most notable impact of the tick size reduction is a substantial increase in the liquidity demand of high-frequency traders (HFTs), not the decrease in their liquidity provision predicted by recent literature. We show that this change in behavior is linked to the richer information environment that arises with the smaller tick size and to the ability of fast traders to profit from it, often at the detriment of slower traders. Following the tick size decrease and the increase in liquidity demand by HFTs in the spot market, the role of the spot market in price discovery drops relative to that of the futures market. We discuss these findings in the context of the impact of HFTs on the information content of financial markets.

An Agent-Based Model for Designing a Financial Market That Works Well

Designing a financial market that works well is very important for developing and maintaining an advanced economy, but is not easy because changing detailed rules, even ones that seem trivial, sometimes causes unexpected large impacts and side effects. A computer simulation using an agent-based model can directly treat and clearly explain such complex systems where micro processes and macro phenomena interact. Many effective agent-based models investigating human behavior have already been developed. Recently, an artificial market model, which is an agent-based model for a financial market, has started to contribute to discussions on rules and regulations of actual financial markets. I introduce an artificial market model to design financial markets that work well and describe a previous study investigating tick size reduction. I hope that more artificial market models will contribute to designing financial markets that work well to further develop and maintain advanced economies.

The Impacts of Minimum Trading Units and Tick Size Changes on Bid-ask Spread, Depth, and Trading Volume: Evidence from the Indonesia Stock Exchange

Purpose – This research aims to analyze the differences in the bid-ask spread, depth, and trading volume after a new tick size and minimum trading unit policy were imposed by the Indonesian Stock Exchange (IDX) on January the 6th, 2014. Design/Methodology/Approach – This research is exercised on the three variables of liquidity, i.e. the bid-ask spread, the depth, and the trading volume. This research used a paired difference test to measure the impact before and after the policy was imposed. Findings – The results showed that the smaller the tick size, the greater the average decrease of the bid-ask spread, ask depth, and bid depth, but the trading volume did not show a significant average difference. Research Implications – The tick size reduction was consistent and supported the previous research from different countries. The bid-ask spread, ask depth, and bid depth significantly decreased, and the trading volume had a tendency to increase as well, although it was not significant. Results are aimed at the IDX and Bapepam as additional information related to the changes that occurred as a result of the implementation of the new policy in stock trading. Investors can use the information from this study to make investment decisions.

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

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.

Tick Size, Trading Strategies and Market Quality

We model a public limit order book (PLB) with rational investors choosing to supply or demand liquidity. Following a reduction in the tick size the effects on PLB’s market quality depend on the liquidity of the stocks. Spread improves for tick-constrained stocks and deteriorates for unconstrained stocks; inside depth decreases in particular for constrained stocks, and volume increases for unconstrained stocks. The model also shows how results change when competition from a crossing network generates order flow migration. We find empirical support for these predictions by exploiting the 2014 reduction of tick size at the Tokyo Stock Exchange.