Tick Size, Competition for Liquidity Provision, and Price Discovery: Evidence from the US Treasury Market

• 成果类型: Article
• 署名作者: Fleming, Michael; Nguyen, Giang; Ruela, Francisco
• 署名单位: Federal Reserve System - USA; Federal Reserve Bank - New York; Pennsylvania Commonwealth System of Higher Education (PCSHE); Pennsylvania State University; Pennsylvania State University - University Park; University of Chicago
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2022.4663
• 发表日期: 2024
• 关键词: tick size; Bid-ask spread; market liquidity; Price efficiency; Price discovery; liquidity provision; Treasury securities; Dealers; principal trading firms; high frequency trading firms

摘要

This paper studies how a tick size change affects market quality, price discovery, and the competition for liquidity provision by dealers and high-frequency trading firms (HFTs) in the U.S. Treasury market. Using difference-in-differences regressions around the November 19, 2018, tick size reduction in the 2-year Treasury note and a similar change in the 2-year futures eight weeks later, we find significantly improved market quality. Moreover, dealers become more competitive in liquidity provision and price improvement, consistent with the hypothesis that HFTs find liquidity provision less profitable in the smaller tick size environment. Last, we find a significant shift in short-run price discovery toward the cash market, which then reverses when the futures market tick size is reduced, suggesting that the finer pricing grid in the cash market allows traders to act on small information signals that are not profitable to exploit in the larger-tick futures market. Our findings suggest that reducing the tick size in tick-constrained and highly liquid markets like the Treasury market is on balance beneficial.