Tick Sizes and Market Quality: Revisiting the Tick Size Pilot
Dec. 14, 2022
Yashar H. Barardehi, Peter Dixon, Qiyu Liu, and Ariel Lohr
Existing research offers scant guidance regarding how tick size changes affect market quality for all but tick constrained stocks. Using comprehensive depth of book data from MIDAS, we examine both the imposition and conclusion of the tick size pilot (TSP) using quantile and OLS regressions, and perform a more granular analysis of non-tick constrained stocks than is provided in the existing literature. Our results support characterizing a tick size change as a tradeoff between allowing markets to establish equilibrium prices (pricing fidelity) and complexity/undercutting concerns. Our analysis suggests that TSP stocks with fewer than two (more than 15) ticks intra spread generally experience an improvement in liquidity when the tick size is reduced (increased).