Impact of MiFID II tick‐size regime on equity markets—Evidence from the LSE

Abstract

This study investigates the impact of MiFID II on the London Stock Exchange. We find that a tick-size reduction leads to lower bid-ask spreads, lower trade values, reduced cost of trading at and beyond the best bid-offer, an acceleration of quote updates, an increase in aggressive trades and a reduction in price impact.Increased tick size widens spreads and increases trading costs. Step functions reveal that liquidity adjusts opposite to the tick change. To determine if impacts are proportional, we identify potential functions that predict cost changes with tick updates, implying that traders adjust their trade sizes according to the new tick levels.