One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations

Verousis, T., Perotti, P. and Sermpinis, G. (2017) One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations. Review of Quantitative Finance and Accounting, (doi:10.1007/s11156-017-0632-2) (Early Online Publication)

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Abstract

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 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 literature on the minimum trade unit and the recent calls for a minimum resting time for quotes.

Item Type:Articles
Status:Early Online Publication
Refereed:Yes
Glasgow Author(s) Enlighten ID:Verousis, Dr Thanos and Sermpinis, Dr Georgios
Authors: Verousis, T., Perotti, P., and Sermpinis, G.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Review of Quantitative Finance and Accounting
Publisher:Springer
ISSN:0924-865X
ISSN (Online):1573-7179
Published Online:28 March 2017
Copyright Holders:Copyright © 2017 The Authors
First Published:First published in Review of Quantitative Finance and Accounting 2017
Publisher Policy:Reproduced under a Creative Commons License

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