Staff Reports
Minimum Price Increment, Competition for Liquidity Provision, and Price Discovery
Previous title: “Tick Size Change and Market Quality in the U.S. Treasury Market”
Number 886
April 2019 Revised February 2021

JEL classification: G12, G14, G18

Authors: Michael J. Fleming, Giang Nguyen, and Francisco Ruela

This paper studies the effects of a recent tick size reduction in the U.S. Treasury securities market. We find significantly narrower bid-ask spreads, increased trading activity, improved depth within one old tick despite lower overall market depth, and improved price efficiency. Moreover, slow traders become more competitive in liquidity provision and price improvement. Finally, high-frequency price discovery shifts to the smaller-tick cash market from the associated futures market, supporting the idea that a finer pricing grid allows traders to act promptly on even small information signals otherwise not profitable. Overall, we conclude that the tick size reduction improves market quality.

Available only in PDF
AUTHOR DISCLOSURE STATEMENT(S)
Michael Fleming
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.

Giang Nguyen
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.

Francisco Ruela
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html. Use of BrokerTec data was subject to review by BrokerTec Americas LLC prior to circulation.
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