U.S. Tick Size Pilot

Barbara Rindi
Bocconi University and IGIER and Baffi-Carefin

Ingrid M. Werner
The Ohio State University

First Draft: May 30, 2017
This Draft: September 22, 2017

Abstract
The U.S. equity markets are currently conducting a pilot study of the effects of a larger tick size on market quality and on the rewards for liquidity provision. We show that the larger tick size causes quoted and effective spreads, but also depth, to increase. This raises the cost for retail-sized liquidity demanding orders by almost fifty percent. However, average trade size increases, suggesting that institutions may benefit from the deeper quotes. The larger tick size translates into forty percent higher profits to liquidity providers despite larger price impacts. We attribute these changes mainly to the changes in tick size for displayed quotes, while there are modest or no effects of requiring all trades to execute on a coarser price grid. Moreover, the bulk of the effects occur for tick-constrained stocks which trading costs more than double. By contrast, trading costs for unconstrained stocks decline by more than ten percent. Finally, we document significant spillovers to stocks with unchanged tick size. Our evidence suggests that some market makers left stocks trading in decimals for the more lucrative pilot stocks, and that the reduced competition causes quoted spreads and rewards for liquidity provision to increase also for stocks trading in decimals.