U.S. Tick Size Pilot: Impact on Market Liquidity and Pricing
Study reveals how tick size changes affect fundamental price discovery in US markets.
1The Tick Size Pilot Program
The U.S. Securities and Exchange Commission initiated the Tick Size Pilot Program to study how widening the minimum price increment (tick size) for small-cap stocks affects market quality. Running from 2016-2018, it involved 1,200 securities divided into test groups with different tick size rules. The program aimed to determine if larger ticks would improve liquidity and facilitate capital formation for smaller companies. Researchers continue analyzing its long-term impacts on market microstructure.
2Key Research Findings
The 2026 study by Allena and Chordia found that wider tick sizes reduced displayed liquidity but improved fundamental price efficiency. Their analysis of over 2.5 million trades showed narrower bid-ask spreads but increased implementation shortfall. The research suggests that while larger ticks may reduce visible liquidity, they enhance the accuracy of price discovery by reducing noise trading. These findings challenge conventional market microstructure theories about tick size effects.
3Liquidity vs. Price Discovery
The study reveals a fundamental trade-off between liquidity and price discovery. While narrower ticks increase displayed liquidity, they may degrade price accuracy by encouraging high-frequency trading strategies. Wider ticks appear to benefit long-term investors by reducing microstructure noise. The researchers developed new metrics to quantify this relationship, showing how tick size affects the incorporation of fundamental information into prices.
4Impact on Market Participants
Different market participants were affected unevenly. Institutional investors benefited from improved price accuracy despite higher trading costs. Retail investors faced wider spreads but potentially better execution quality. Market makers saw reduced profitability due to narrower spreads but lower adverse selection costs. The findings suggest optimal tick sizes may vary by security type and investor base.
5Methodological Innovations
The researchers introduced novel econometric techniques to isolate tick size effects from other market factors. Their approach combined machine learning with traditional time-series analysis to measure price efficiency. They developed a new 'liquidity quality index' that accounts for both displayed depth and price accuracy. The methodology sets a new standard for market structure research.
6International Comparisons
The study compares U.S. results with similar experiments in Europe and Asia. While Asian markets saw more pronounced liquidity improvements from tick size changes, European results aligned closer with U.S. findings. The research identifies market fragmentation and regulatory differences as key factors explaining cross-country variations in tick size effects.
7Policy Implications
The findings suggest regulators should consider security-specific tick sizes rather than one-size-fits-all rules. For small-cap stocks where price discovery is challenging, wider ticks may be beneficial. The research provides empirical support for flexible market structures that can adapt to different securities' characteristics and trading needs.
8Future Research Directions
The study opens new questions about dynamic tick size regimes that could adjust to market conditions. Researchers suggest exploring time-varying ticks or tick sizes tied to volatility measures. Future work could also examine how tick size interacts with other market structure elements like dark pools or periodic auctions. These findings reshape our understanding of market quality metrics.