Abstract
A tick size is the smallest increment of a security price. Tick size is typically regulated by the exchange where the security is traded and it may be modified either because the exchange enforces an overall tick size change or because the price of the security is too low or too high. There is an extensive literature, partially reviewed in Sect. 2 of the present paper, on the role of tick size in the price formation process. However, the role and the importance of tick size has not been yet fully understood, as testified, for example, by a recent document of the Committee of European Securities Regulators (CESR) [1].
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
http://www.cesr-eu.org/index.php?page=consultation details&id=158
Bouchaud JP, Farmer JD, Lillo F (2009) How markets slowly digest changes in supply and demand. In Hens T, Schenk-Hoppé KR (eds) Handbook of Financial Markets: Dynamics and Evolution, North-Holland
Farmer JD, Gillemot L, Lillo F, Mike S, Sen A (2004) What really causes large price changes? Quantitative Finance 4: 383–397
Ponzi A, Lillo F, Mantegna RN (2009) Market reaction to a bid-ask spread change: A power-law relaxation dynamics. Physical Review E 80:016112
Crack TF (1994), Tinkering with ticks: choosing minimum price variation for U.S. equity markets. Working Paper, Massachusetts Institute of Technology, unpublished
Ahn H, Cao CQ, Choe H (1996) Tick size, spread and volume. Journal of Financial Intermediation 5:2–22
Niemeyer J, and Sandås P (1994) Tick size, market liquidity and trading volume: evidence from the Stockholm Stock Exchange. Working Paper, Stockholm School of Economics, unpublished
Angel JJ (1997) Tick size, share price, and stock splits. Journal of Finance 52:655–681
Bacidore J (1997) The impact of decimialization on market quality: an empirical investigation of the Toronto Stock Exchange. Journal of Financial Intermediation 6:92–120
Porter D and Weaver D (1997) Decimalization and market quality. Financial Management 26:5–26
Huson M, Kim Y, Mehrotra V (1997) Decimal quotes, market quality, and competition for order flow: evidence from the Toronto Stock Exchange. Working Paper, University of Alberta, unpublished
Ahn H, Cao CQ, Choe H (1998) Decimalization and competition among stock markets: evidence from the Toronto Stock Exchange cross-listed securities. Journal of Financial Markets 1:51–87
Bessembinder H (1997) Endogenous changes in the minimum tick: an analysis of Nasdaq securities trading near ten dollars. Working Paper, Arizona State University, unpublished
Ronen T, and Weaver DG (1998) Teenies’ anyone: the case of the American Stock Exchange. Working Paper, Rutgers University, unpublished
Bollen NPB, Whaley RE (1998) Are “teenies” better? Journal of Portfolio Management 25:10–24
Ricker JP (1998) Breaking the eighth: sixteenths on the New York Stock Exchange. Working Paper, unpublished
Jones CM, Lipson ML (2001) Sixteenths: Direct Evidence on Institutional Trading Costs. Journal of Financial Economics 59:253–278
Goldstein MA, Kavajecz KA (2000) Eighths, sixteenths, and market depth: changes in tick size and liquidity provision on the NYSE. Journal of Financial Economics 56:125–149
Huang RD, Stoll HR (2001) Tick Size, Bid-Ask Spreads, and Market Structure. The Journal of Financial and Quantitative Analysis 36:503–522
Bacidore J, Battalio R, Jennings R (2001) Changes in Order Characteristics, Displayed Liquidity, and Execution Quality on the New York Stock Exchange around the Switch to Decimal Pricing. New York Stock Exchange Working Paper
Onnela JP, Töyli J, Kaski K (2009) Tick size and stock returns. Physica A: Statistical Mechanics and its Applications 388:441–454
Münnix MC, Schfer R, Guhr T (2010) Impact of the tick-size on financial returns and correlations. preprint at arXiv:1001.5124v4
Epps TW (1979) Comovements in stock prices in the very short run. Journal of the American Statistical Association 74:291–298
Renó R (2003) A closer look at the Epps effect. International Journal of Theoretical and Applied Finance 6:87–102
Tóth B, Kertész J (2009) The epps effect revisited. Quantitative Finance 9:793–802
Ding Z, Granger CWJ, Engle RF (1993) A long-memory property of stock market returns and a new model. Journal of Empirical Finance 1:83–106
Gillemot L, Farmer JD, Lillo F (2006) There’s more to volatility than volume. Quantitative Finance 6:371–384
Peng CK, Buldyrev SV, Havlin S, Simons M, Stanley HE, Goldberger AL (1994) Mosaic organization of DNA nucleotides. Physical Review E 49: 1685–1689
La Spada G et al. (2010) Effect of coarse-graining on the diffusion properties of a long memory process. in preparation
Engle RF (1982) Autoregressive Conditional Heteroscedasticity with Estimates of Variance of United Kingdom Inflation. Econometrica 50:987–1008
Mandelbrot BB, Taylor HM (1967) On distribution of stock price differences. Operations Research 15:1057–1062
Clark PK (1973) Subordinated stochastic process model with finite variance for speculative prices. Econometrica 41:135–155
Ane T, Geman H (2000) Order flow, transaction clock, and normality of asset returns. The Journal of Finance 55 2259–2284
Plerou V, Gopikrishnan P, Stanley HE (2005) Quantifying fluctuations in market liquidity: analysis of the bid-ask spread. Physical Review E 71:046131
Lillo F, Farmer JD (2005) The key role of liquidity fluctuations in determining large price changes. Fluctuation and Noise Letters 5:L209–L216
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2011 Springer-Verlag Italia
About this chapter
Cite this chapter
La Spada, G., Doyne Farmer, J., Lillo, F. (2011). Tick Size and Price Diffusion. In: Abergel, F., Chakrabarti, B.K., Chakraborti, A., Mitra, M. (eds) Econophysics of Order-driven Markets. New Economic Windows. Springer, Milano. https://doi.org/10.1007/978-88-470-1766-5_12
Download citation
DOI: https://doi.org/10.1007/978-88-470-1766-5_12
Publisher Name: Springer, Milano
Print ISBN: 978-88-470-1765-8
Online ISBN: 978-88-470-1766-5
eBook Packages: Business and EconomicsEconomics and Finance (R0)