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.