The Review of Asset Pricing Studies Vol. 9 No. 1 2019

Relative Tick Size and the Trading Environment

Maureen O’Hara¹; Gideon Saar²; Zhuo Zhong³

¹ Johnson Graduate School of Management, Cornell University, University of Technology Sydney · ² Johnson Graduate School of Management, Cornell University · ³ Department of Finance, University of Melbourne

Abstract

We investigate how and why relative tick sizes influence traders’ order strategies, and how this affects liquidity provision in the market. Using unique NYSE data, we find that a larger relative tick size benefits high-frequency trading (HFT) market makers: they leave orders in the book longer, trade more aggressively, and have higher profit margins. In a tick-constrained (tick-unconstrained) environment, larger relative ticks result in greater (less) depth, which is consistent with greater adverse selection coming from increased undercutting of limit orders by informed HFT market makers. Received October 12, 2017; editorial decision August 21, 2018 by Editor Thierry Foucault.

DOI

10.1093/rapstu/ray009

Volume

9

Issue

1

Pages

47-90

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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