Does the Tick Size Affect Stock Prices? Evidence from the Tick Size Pilot Announcement of the Test Groups and the Control Group
Nov. 9, 2018
Salil Pachare and Ilia Rainer
Abstract
The Tick Size Pilot (“Pilot”) increased the tick size from $0.01 to $0.05 for certain small
capitalization stocks randomly assigned to three Test Groups. We find that the
announcement of the assignment of stocks to the Test Groups and the Control Group did
not generate significant abnormal returns for stocks in the Test Groups, neither in absolute
terms nor relative to stocks in the Control Group. These results hold even when we limit the
analysis to stocks with pre‐Pilot quoted spreads smaller than $0.05. Our findings suggest
that the market did not expect the Pilot to affect stock prices of companies in the Test
Groups. Under the standard assumption that the market’s expectations about the effects of
the Pilot were correct, this result indicates that the increase in tick size associated with the
Pilot had no impact on stock prices. Thus, from a policy perspective, our findings cast doubt
on the idea that similar changes in tick size can affect cost of capital of small capitalization
companies. In particular, our findings are inconsistent with the view that the increase in tick
size harmed companies in the Test Groups because reduced liquidity of their stocks led to
lower investor demand and lower stock prices. At the same time, our findings are also
inconsistent with the view that the increase in tick size benefited companies in the Test
Groups because stronger incentives of market makers to promote their stocks led to higher
investor demand and higher stock prices.