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.

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