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On the other hand, the Intercontinental Exchange reduced the tick size for sterling interest rate futures towards the end of 2018, and the result was ... decrea
by twic 7y ago
On the other hand, the Intercontinental Exchange reduced the tick size for sterling interest rate futures towards the end of 2018, and the result was ... decreased liquidity! And resulting increased volatility.
I'm not sure anyone knows for sure why this happened, but the best theory i've heard is that the reduction in tick size reduced the expected profits of market makers, because they are collecting less spread on every contract they turn around, while not affecting their potential losses, because external factors which cause the market to jump three basis points will still cause it to jump three basis points. Halved regular profits divided by constant occasional losses equals no longer worth bothering with.
- doctorpangloss 7y agoOr there was adverse selection: only kooky traders go into kooky trading rules.
- harry8 7y agoyou have some firms that know how to quote a product and can make enough money doing it to be worthwhile. They've done a lot of research and implemented systems to do that. Change the rules on them for arbitrary reasons, the firms that were there leave. At least long enough to build new systems and trading strategies. Who replaces them, anyone? Why? Increase the tick size, liquidity drops. Decrease the tick size, liquidity drops. The moral there is know why you are changing the rules in the market, how you are doing it and the implementation details and side effects that will result in getting the result you want or just don't do it. This could be better is garbage, know it is. Change is not good for its own sake if you want people to quote.