UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: We explore an event where three stock exchanges (Chi-X, Turquoise, BATS Europe) in 2009 reduced their tick sizes (the minimum price increment in the limit order book) for stocks with a primary listing at the Oslo Stock Exchange (OSE). The OSE quickly responded by reducing its own tick sizes, before all markets agreed on a common tick size structure. Consistent with recent theoretical work by Buti, Consonni, Rindi, Wen and Werner (2015), we find that markets with small tick sizes capture market shares. However, inconsistent with Buti et al, we find little evidence that the observed changes to market shares are due to cross-market differences in tick size constraints. Instead, our empirical results suggest that the tick size affects the distribution of market shares through its impact on the trading behavior of high-frequency traders. Finally, we find that tick size reductions appear to have negative spill-over effects on the stock liquidity in markets that keep larger tick sizes.

Keywords: Equity Trading; Limit Order Markets; Tick Sizes; High Frequency Trading

JEL-codes: G10; G20

49 pages, November 9, 2016

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uis_wps_2016_15_meling_odegaard.pdf  

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