Tick size and the returns to providing liquidity
This paper examines the effect of a reduction in tick size on the profits of liquidity providers, proxied for by returns to an investment strategy in which a series of limit orders is submitted at fixed increments around the last traded price. Profits and trading activity by a naïve liquidity provider are examined before and after the Toronto Stock Exchange's (TSE's) move from eighth to nickel ticks. We document a very large decline in the profits to liquidity providers following the change in tick size. The change in profits is both statistically and economically significant. As well, the results vary by price and volume.
|Keywords||Decimalization, Limit orders, Liquidity, Tick size|
|Journal||International Review of Economics and Finance|
MacKinnon, G. (Greg), & Nemiroff, H. (2004). Tick size and the returns to providing liquidity. International Review of Economics and Finance (Vol. 13, pp. 57–73). doi:10.1016/j.iref.2003.08.002