"Tick Size, Trading Strategies and Market Quality" by Barbara Rindi, accepted at Management Science
Barbara Rindi, Ingrid Werner, Sabrina Buti, and Yuanji Wen
Accepted at Management Science
In this paper we investigate the effects of a tick-size reduction on market quality in a multi-period limit order book market. For illiquid stocks, reducing the tick size facilitates under-cutting 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.