Relative Tick Size and the Trading Environment

Assistant Professor, Department of Finance, The University of Melbourne

Prof. Zhuo Zhong's CV

This paper examines how the relative tick size influences market liquidity and the biodiversity of trader interactions. Using unique NYSE order-level data, we find that a larger relative tick size benefits High-Frequency Trading (HFT) firms that make markets on the NYSE: they leave orders in the book longer, trade more aggressively, and have higher profit margins. The effects of a larger relative tick size on the market are more complex. In a one-tick spread environment, a larger relative tick size results in greater depth and more volume; in a multi-tick environment, the opposite outcome prevails. The negative impact on depth and volume in the multi-tick environment is consistent with greater adverse selection coming from increased undercutting of limit orders by informed HFT market makers.