Tick size and price efficiency: Further evidence from the Tick Size Pilot Program

This paper examines whether larger tick sizes improve or hinder price efficiency for small-capitalization stocks using data from implementing and terminating the Tick Size Pilot Program (TSPP). We show that the TSPP led to increases in various liquidity measures, and its termination restored them to...

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Bibliographic Details
Published in:	Financial management Vol. 52; no. 3; pp. 483 - 511
Main Authors:	Chung, Kee H, Chuwonganant, Chairat
Format:	Journal Article
Language:	English
Published:	Tampa Financial Management Association 22-09-2023 Blackwell Publishing Ltd
Subjects:	Financial research Industrial efficiency Liquidity Small capitalization stocks Termination United States
Online Access:	Get full text
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Summary:	This paper examines whether larger tick sizes improve or hinder price efficiency for small-capitalization stocks using data from implementing and terminating the Tick Size Pilot Program (TSPP). We show that the TSPP led to increases in various liquidity measures, and its termination restored them to their pre-TSPP levels. We also find evidence that the TSPP led to trader migration from the pilot to control stocks. The TSPP implementation (termination) is associated with decreases (increases) in price efficiency, indicating that price efficiency decreases with tick sizes. Liquidity and informed trading are two channels through which the TSPP changes price efficiency.
ISSN:	0046-3892 1755-053X
DOI:	10.1111/fima.12419