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A more granular tick doesn't just "spread out" the existing liquidity to a bunch of price levels--it meaningfully decreases incentives to post serious size. The
by ctlby 11y ago
A more granular tick doesn't just "spread out" the existing liquidity to a bunch of price levels--it meaningfully decreases incentives to post serious size. The spread will end up being marginally tighter, but with thinner books, you still pay more to trade large amounts. The objective function to minimize is transaction costs, not spread.
- beagle3 11y ago> it meaningfully decreases incentives to post serious size Do you have support for that claim? (I don't have an opinion; Trying to form one based on data)
- ctlby 11y agoThe second page contains a succinct summary of theoretical reasons why this is true. The rest of the paper goes over empirical findings: http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/G2%20Decimalization.pdf http://www.acsu.buffalo.edu/~keechung/MGF743/Readings/G2%20D... Since then, we have additional data points from the decimalized US equity markets. See http://www.sec.gov/rules/other/2014/34-72460.pdf http://www.sec.gov/rules/other/2014/34-72460.pdf for a bibliography. The weight of the evidence points towards thinner books. Incidentally, the SEC is looking to increase the tick size for illiquid small-cap stocks for this very reason.
- beagle3 11y agoThanks!