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The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility

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Abstract

This study presents an analysis of the impact of the introduction of quotes in sixteenths of a dollar on the AMEX, Nasdaq, and NYSE in mid-1997 on select market characteristics such as spreads, effective spreads, quoted depth, and volume. The findings of the study document reductions in the bid-ask spread, effective spread, and a statistically significant increase in the number of quotes. Interestingly, we find that liquidity, as measured by the total depth at the bid and ask, declines significantly on the AMEX and NYSE, but increases on the Nasdaq. Trading volume increases on the NYSE, but remains unchanged for the AMEX and Nasdaq. We also find that the proportion of even-increment quotes is a relevant factor affecting percentage spreads for Nasdaq both before and after and for the NYSE only after the change in quoting increments.

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Authors and Affiliations

  1. Kansas State University, USA

    Bonnie F. Van Ness

  2. Kansas State University, 117 D Calvin Hall, Manhattan, KS, 66506

    Robert A. Van Ness

  3. University of Missouri, Kansas City

    Stephen W. Pruitt

Authors
  1. Bonnie F. Van Ness
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  2. Robert A. Van Ness
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  3. Stephen W. Pruitt
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Van Ness, B.F., Van Ness, R.A. & Pruitt, S.W. The Impact of the Reduction in Tick Increments in Major U.S. Markets on Spreads, Depth, and Volatility. Review of Quantitative Finance and Accounting 15, 153–167 (2000). https://doi.org/10.1023/A:1008369114062

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  • DOI: https://doi.org/10.1023/A:1008369114062

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