Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/210738 
Year of Publication: 
2019
Series/Report no.: 
Staff Report No. 886
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
This paper studies a recent tick size reduction in the U.S. Treasury securities market and identifies its effects on the market's liquidity and price efficiency. Employing difference-indifference regressions, we find that the bid-ask spread narrows significantly after the change, even for large trades, and that trading volume increases. Market depth declines markedly at the inside tier and across the book, but cumulative depth close to the top of the book changes little or even increases slightly. Furthermore, the smaller tick size enables prices to adjust more easily to information and better reflect true value, resulting in greater price efficiency. Price informativeness remains largely similar before and after, suggesting that the reduction in trading costs does not result in increased information acquisition. However, there is clear evidence of an information shift from the futures market toward the smaller-tick-size cash market. Overall, we conclude that the tick size reduction improves market quality.
Subjects: 
tick size reduction
bid-ask spread
market liquidity
price efficiency
Treasury securities
JEL: 
D14
G01
G12
G18
Document Type: 
Working Paper

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