Impacts of Tick Size Reduction on Transaction Costs

Yu Wu, Tim Krehbiel, B. Wade Brorsen

Abstract


This study investigates the impact of changes in tick size on transaction costs of different size trades. We use samples drawn from shares with extreme high/low price and high/low trading volume to examine the impact of the 1997 and 2001 reductions in tick size on the New York Stock Exchange. For high-price low-volume NYSE shares, the 1997 change from pricing in $1/8s to pricing in $1/16ths clearly increased effective spreads for transactions of even the smallest size, but the effect of the further reductions in 2001 while still mostly positive for high-price low-volume stocks was not statistically significant. Thus, while tick size reduction does reduce liquidity costs for most stocks, it does not do so for all stocks.


Full Text: PDF DOI: 10.5539/ijef.v3n6p57

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This work is licensed under a Creative Commons Attribution 3.0 License.

International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)

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