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One Size Fits All? High Frequency Trading Tick Size Changes and the Implications for Exchanges: Market Quality and Market Structure Considerations

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Author
Thanos Verousis Pietro Perotti Georgios Sermpinis
Category
Financial
Date Posted
2017/03/20
Date Retrieved
2022/07/29
Date Revised
2022/07/28
Date Written
2017/03/17
Description
This paper offers a systematic review of the empirical literature on the implications of tick size changes for exchanges. Our focus is twofold: first we are concerned with the market quality implications of a change in the minimum tick size. Second we are interested in the implications of changes in the minimum tick size on market structure. We show that there is a large body of empirical literature that documents a decrease in transaction costs following a decrease in the minimum tick size. However even though market liquidity increases the incentive to provide market making activities decreases. We document a strong link between the minimum tick size regulations and the recent increase in High Frequency Trading (HFT) activity. A smaller tick enhances the price discovery process. However the question of how multiple tick size regimes affect market liquidity in a fragmented market remains to be answered. Finally we identify topics for future research; we discuss the empirical literatur
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JEL Classifications
G14 G18
Keywords
tick size market quality microstructure high frequency trading trading costs minimum trading unit
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