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The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility

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  • Van Ness, Bonnie F
  • Van Ness, Robert A
  • Pruitt, Stephen W

Abstract

This study presents an analysis of the impact of the introduction of quotes in sixteenths of a dollar on the AMEX, Nasdaq, and NYSE in mid-1997 on select market characteristics such as spreads, effective spreads, quoted depth, and volume. The findings of the study document reductions in the bid-ask spread, effective spread, and a statistically significant increase in the number of quotes. Interestingly, we find that liquidity, as measured by the total depth at the bid and ask, declines significantly on the AMEX and NYSE, but increases on the Nasdaq. Trading volume increases on the NYSE, but remains unchanged for the AMEX and Nasdaq. We also find that the proportion of even-increment quotes is a relevant factor affecting percentage spreads for Nasdaq both before and after and for the NYSE only after the change in quoting increments. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Van Ness, Bonnie F & Van Ness, Robert A & Pruitt, Stephen W, 2000. "The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility," Review of Quantitative Finance and Accounting, Springer, vol. 15(2), pages 153-167, September.
  • Handle: RePEc:kap:rqfnac:v:15:y:2000:i:2:p:153-67
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    Citations

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    Cited by:

    1. Kee Chung & Jangkoo Kang & Joon-Seok Kim, 2011. "Tick size, market structure, and market quality," Review of Quantitative Finance and Accounting, Springer, vol. 36(1), pages 57-81, January.
    2. Chung, Kee H. & Van Ness, Robert A., 2001. "Order handling rules, tick size, and the intraday pattern of bid-ask spreads for Nasdaq stocks," Journal of Financial Markets, Elsevier, vol. 4(2), pages 143-161, April.
    3. Loistl, Otto & Schossmann, Bernd & Veverka, Alexander, 2004. "Tick size and spreads: The case of Nasdaq's decimalization," European Journal of Operational Research, Elsevier, vol. 155(2), pages 317-334, June.
    4. Goldstein, Michael A. & A. Kavajecz, Kenneth, 2000. "Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE," Journal of Financial Economics, Elsevier, vol. 56(1), pages 125-149, April.
    5. Dmitry Levando & Maxim Sakharov, 2018. "Natural Instability of Equilibrium Prices," Working Papers 2018:01, Department of Economics, University of Venice "Ca' Foscari".
    6. Large, Jeremy, 2009. "A market-clearing role for inefficiency on a limit order book," Journal of Financial Economics, Elsevier, vol. 91(1), pages 102-117, January.
    7. repec:kap:rqfnac:v:50:y:2018:i:2:d:10.1007_s11156-017-0632-2 is not listed on IDEAS
    8. MacKinnon, Greg & Nemiroff, Howard, 2004. "Tick size and the returns to providing liquidity," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 57-73.
    9. Ahn, Hee-Joon & Cai, Jun & Chan, Kalok & Hamao, Yasushi, 2007. "Tick size change and liquidity provision on the Tokyo Stock Exchange," Journal of the Japanese and International Economies, Elsevier, vol. 21(2), pages 173-194, June.
    10. Charlie Charoenwong & David K. Ding & Tiong Yang Thong, 2016. "Decimalization, IPO aftermath, and liquidity," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1303-1344, November.
    11. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    12. Cai, Jun & Hamao, Yasushi & Ho, Richard Y.K., 2008. "Tick size change and liquidity provision for Japanese stock trading near [yen sign]1000," Japan and the World Economy, Elsevier, vol. 20(1), pages 19-39, January.
    13. Ke, Mei-Chu & Jiang, Ching-Hai & Huang, Yen-Sheng, 2004. "The impact of tick size on intraday stock price behavior: evidence from the Taiwan Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 19-39, January.
    14. Battalio, Robert H. & Lerman, Alina & Livnat, Joshua & Mendenhall, Richard R., 2012. "Who, if anyone, reacts to accrual information?," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 205-224.
    15. Chung, Kee H. & Chuwonganant, Chairat, 2002. "Tick size and quote revisions on the NYSE," Journal of Financial Markets, Elsevier, vol. 5(4), pages 391-410, October.
    16. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4.
    17. Bourghelle, David & Declerck, Fany, 2004. "Why markets should not necessarily reduce the tick size," Journal of Banking & Finance, Elsevier, vol. 28(2), pages 373-398, February.

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