Tick Size and Quote Revisions on the NYSE

Abstract

In this paper, we analyze how tick size affects quote revisions on the NYSE and whether pre-decimalization tick sizes ($1/8 and $1/16) were binding constraints on specialists' spreadand price-quote decisions. We find that the number of quote revisions that involve changes in the spread increased dramatically after the tick-size reduction in 1997. The number of spreadquote revisions is smaller for stocks with lower prices and larger volumes during both the pre and post tick-size change periods. We interpret this result as evidence that the minimum price variation is a binding constraint on absolute spreads even after the tick-size reduction, especially for low-price and/or large-volume stocks. The number of quote revisions that involve changes in the spread (depth) is largest (smallest) during the early hour of trading, suggesting that the minimum price variation is least likely to be the binding constraint on spreads during the early hour of trading. These results suggest that decimalization is likely to further reduce price rigidity and increase price competition. Consistent with this expectation, we find a significant increase in the frequency of spread-and price-quote revisions after decimalization. r

Tick size change and liquidity provision on the Tokyo Stock Exchange

“…With a smaller tick size, it becomes easier for limit-order traders to step in front of one another in a limit-order market. Chung and Chuwonganant (2001) find evidence consistent with this conjecture. They show that the number of quote revisions that involve changes in the spread increased dramatically after the tick-size is reduced from $1/8 to $1/16.…”

One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations

“…The authors argue that microstructure characteristics, such as the tick size, are endogenous to market structure; that is the difference between an auction and a dealer market. Empirically, the findings of Huang and Stoll (2001) are confirmed by Chung and Chuwonganant (2002) who show that execution costs are lower in auction markets than they are in dealer markets. Theoretically, for a dealer market, Kadan (2006) shows that the welfare of investors is a function of the number of dealers in the market; if the number of dealers in the market is large, investors will prefer a small tick size.…”

“…However, regarding dealer markets, Bessembinder (2000) argues that the relationship between tick size and market quality is relatively more complex than is hypothesized. In relation to the latter, Chakravarty et al (2004) and Chung and Chuwonganant (2002) show that the smaller tick increases price competition on the limit order book, hence reducing price rigidity, and Zhao and Chung (2006) show that a smaller tick increases the informational efficiency of prices. The latter is clearly related to price discovery studies which will be discussed in Sect.…”

Decimalization, IPO aftermath, and liquidity

“…The conversion was carried out over four stages, with the first stage occurring on August 28, 2000 and the last stage being completed on January 29, 2001. Henceforth, numerous studies have investigated the effects of tick size reductions on the spreads and depths of NYSE stocks [see, for example, Bollen and Whaley (1998), Goldstein and Kavajecz (2000), Van Ness et al (2000), Chung and Chuwonganant (2002), Bacidore et al (2003), and Chakravarty et al (2004)]. Bollen and Whaley (1998), Goldstein and Kavajecz (2000), and Van Ness et al (2000), and Jones and Lipson (2001) investigate the effects of the tick size reduction from $1/8 to $1/16 on common stocks.…”