Journal article
Relative Tick Size and the Trading Environment
Zhuo Zhong, Maureen O'Hara, Saar Gideon
Review of Asset Pricing Studies | Oxford University Press (OUP) | Published : 2019
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.
Grants
Funding Acknowledgements
We thank Viral Acharya, Jim Angel, Bruno Biais, Jonathan Brogaard (WFA discussant), Thierry Foucault (the editor), Simon Gervais, Michael Goldstein, Terrence Hendershott, Charles Jones, Andrew Lo, and an anonymous referee for helpful comments, as well as seminar participants at the City University of Hong Kong, Princeton University, the Securities and Exchange Commission, the University of Cambridge, Xiamen University, FINRA's Economic Advisory Committee meeting, the Workshop on Microstructure Theory and Application (Cambridge), the 2015 Center for International Finance and Regulation Conference, and the 2016 WFA conference. The NYSE provided us with data and financial support for analyzing the data. All conclusions are those of the authors and do not represent the views of theNYSE. Supplementary data can be found on The Review of Asset Pricing Studies web site. Send correspondence to Maureen O'Hara, 447 Sage Hall, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853. Telephone: (607) 255-3645. E-mail: mo19@cornell.edu.