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

JEL classification: D14, G01, G12, G18

Authors: Michael Fleming, Giang Nguyen, and Francisco Ruela

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.

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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.