When does the tick size help or harm market quality? Evidence from the Tick Size Pilot

Tick sizes affect market quality through a tradeoff between pricing fidelity and undercutting. The U.S. Tick Size Pilot (TSP), which raised the minimum tick from 1¢ to 5¢, provides a natural experiment to study this tradeoff. We find that the TSP harmed liquidity for stocks with spreads below 10¢ but improved liquidity for stocks with spreads above 15¢. These opposing effects explain the mixed results across prior studies which pool together stocks with very different prevailing spreads. We recommend researchers using the TSP for causal inference should, at minimum, split samples at 10¢-spreads to account for these heterogeneous liquidity effects.