José Penalva (Université Charles III de Madrid), « Revisiting Tick Size and its Relationship with Intraday Market Quality », Paul Woolley Research Initiative Seminar, IDEI, 10 octobre 2016, 12h30–14h00, salle MF 323.
This paper analyzes the effect of the tick size on market quality variables with a view of making specific predictions of what to expect from the SEC pilot program on tick size. We make three analyses with two different datasets. One dataset is a cross-section of over 2000 assets selected from the Russell 3000. The second is a set of assets that have undergone a share split, matched with similar assets that have undergone the split [in progress]. The analyses we perform include: a standard (extended) cross-section analysing the relative tick size in the cross-section of market quality variables (spreads and depth), a similar cross-section analysis of market quality variables (spreads and depth) that incorporates a control for assets with a binding tick size (a quoted spread which is less than 2 cents), and a cross-section analysis of the intraday effect of controls for market quality (volume, volatility, and ultra-fast activity). The paper compares results for the overall cross-section of assets, and compares the full sample with a subsample of (small) assets that correspond to those used in the SEC pilot program. From the analysis we provide specific predictions on the outcome of the pilot program, namely that the traditional implication of greater spreads and depth will apply only to assets that are spread-constrained (quoted spread less that two tick sizes). There is a second relative tick size effect which, if effective, could act as a counterbalance, increasing the spread and depth for all assets with greater tick sizes. “ Cauthored with Mikel Tapia
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Paul Woolley Research Initiative