Staff Reports
Tick Size Change and Market Quality in the U.S. Treasury Market
Number 886
April 2019 Revised November 2019

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. Employing difference-in-differences regressions, we find significantly narrower bid-ask spreads and increased trading activity. Market depth declines overall, but depth close to the top of the book changes little. The smaller tick size enables prices to adjust more easily to information and allows traders to quickly capture their information advantage, resulting in greater price efficiency and an information shift toward the smaller-tick cash market from the futures market. Overall, we conclude that the tick size reduction improves market quality and the information environment.

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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.