The Impact of a Tick Size Reduction on Market Quality: Evidence from the Sydney Futures Exchange
This paper examines the impact of a reduction in the minimum price increment on marketquality in a futures market setting. On 15 December, 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid-ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Both trading volume and price volatility are not significantly affected. Further analysis reveals that execution costs are reduced after the change, with large institutional buy orders experiencing the most significant reduction. These results hold in the overnight trading session, are robust to seasonal patterns in futures trading and are robust to trading in substitute contracts. We conclude that a tick size reduction improves market quality in a futures market setting.
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It is a bit too early to claim victory on this. The tick size increase on Euro-Bobl is only 3 weeks old and markets have been volatile.
Hogwash. Eurex, Liffe and now the CBOT/CME have increased the tick size on their benchmark products after finding that the previously reduced tick size had actually lowered participation and volume traded.