Heterogeneity and Competition in Fragmented Markets: Fees Vs Speed

Abstract

This paper provides an integrated overview of the effects of the implementation of the SEC's Tick Pilot program on liquidity and competition in U.S. markets, separated into three groups by tick size. We confirm the standard effects of tick size changes on quoted spreads, realized spreads, and depth, as well as the role of the size of the quoted spread prior to the change in tick size. We add that the increase in the tick size leads to a significant reduction in the frequency and magnitude of price changes, primarily driven by a reduction in the frequency of aggressive limit orders. The major effect of the tick size is to alter competition by driving trading volume to inverted fee and off-exchange venues. We find that traders prefer a larger price improvement rather than lower latency for the smallest tick stocks while the reverse is true for largest tick stocks. Overall, the effect of the tick change has an insignificant effect on volume except for stocks with the smallest tick sizes subject to the trade-at rule, who see a substantial drop in volume.