Abstract Economically insignificant tick sizes encourage undercutting behavior, thus harming market quality. Theoretical work shows that increasing tick sizes in unconstrained markets reduces undercutting and improves market quality. Equity market pricing grids are generally too coarse to test this prediction. We examine a cryptocurrency market with infinitesimal tick sizes where undercutting limit orders acquire price priority without meaningful economic cost. We show that increasing tick sizes reduces undercutting behavior, increases liquidity provision and quoted depth, and reduces transaction costs for institutional and retail-sized trades while decreasing short-term volatility. Tiny tick sizes are suboptimal, supporting increased minimum trading increments in tick-unconstrained markets.

Abstract We explore the effects of a “tick size war” in which European trading venues directly competed on the minimum pricing increment in the limit order book, the tick size. We find that venues that reduced their tick size immediately captured market shares of both quoted and executed volume from the exchanges that kept their ticks large. We find that tick size competition improves market quality, reducing trading costs, and increasing market-wide depth and volume. These market quality improvements are strongest in stocks where the bid–ask spread was constrained to one tick, where liquidity providers use the finer pricing grid to engage in price competition.

We exploit a unique natural experiment—recent restrictions of dark trading in Canada and Australia—and proprietary trade-level data to analyze the effects of dark trading. Disaggregating two types of dark trading, we find that dark limit order markets are beneficial to market quality, reducing quoted, effective, and realized spreads and increasing informational efficiency. In contrast, we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality. Our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision. We discuss implications for the regulation of dark trading and tick sizes.

Our study evaluates the return sensitivity of cryptocurrencies to various measures of uncertainty (uncertainty beta). We identify that crypto returns react primarily to financial uncertainty, which is the unforecastable component of multiple financial indicators. However, crypto returns are not sensitive to other forms of uncertainty such as macro, real, or policy uncertainty, as well as VIX, and inflation. The portfolio analysis yields a significant financial uncertainty premium of around 21% per month, which is driven by the outperformance (underperformance) of cryptocurrencies with a negative (positive) uncertainty beta. The portfolio returns are more potent in coins with speculative, rather than transactional, features such as proof-of-work, non-token, and mineable. Our findings suggest that large investors exhibit a willingness to pay higher premiums for cryptocurrencies with positive uncertainty betas, as these assets can be used as a hedging tool within a larger financial portfolio.

Cryptocurrencies are among the largest unregulated markets in the world. We find that approximately one-quarter of bitcoin users are involved in illegal activity. We estimate that around $76 billion of illegal activity per year involve bitcoin (46% of bitcoin transactions), which is close to the scale of the U.S. and European markets for illegal drugs. The illegal share of bitcoin activity declines with mainstream interest in bitcoin and with the emergence of more opaque cryptocurrencies. The techniques developed in this paper have applications in cryptocurrency surveillance. Our findings suggest that cryptocurrencies are transforming the black markets by enabling “black e-commerce.” Received June 1, 2017; editorial decision December 8, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.