Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the Nyse

Abstract

We use limit order data provided by the New York Stock Exchange (NYSE) to investigate the impact of reducing the minimum tick size on the liquidity of the market. Specifically, we analyze both spreads and depths (quoted and on the limit order book) for periods before and after the NYSE's change from eighths to sixteenths. Similar to other studies, we find that quoted spreads and quoted depth declined after the change. However, we find that depth declined throughout the entire limit order book as well. The combined effect of smaller spreads and reduced cumulative depth in the limit order book has made liquidity demanders trading small orders better off while those trading large orders worse off. The benefit to the small order occurs mostly in frequently traded stocks, while small orders in infrequently traded stocks see little, if any, benefit.