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Large tick assets: implicit spread and optimal tick size

  • Khalil Dayri
  • Mathieu Rosenbaum
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    In this work, we provide a framework linking microstructural properties of an asset to the tick value of the exchange. In particular, we bring to light a quantity, referred to as implicit spread, playing the role of spread for large tick assets, for which the effective spread is almost always equal to one tick. The relevance of this new parameter is shown both empirically and theoretically. This implicit spread allows us to quantify the tick sizes of large tick assets and to define a notion of optimal tick size. Moreover, our results open the possibility of forecasting the behavior of relevant market quantities after a change in the tick value and to give a way to modify it in order to reach an optimal tick size.

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    File URL: http://arxiv.org/pdf/1207.6325
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    Paper provided by arXiv.org in its series Papers with number 1207.6325.

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    Date of creation: Jul 2012
    Date of revision: Jan 2013
    Handle: RePEc:arx:papers:1207.6325
    Contact details of provider: Web page: http://arxiv.org/

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