Market Transparency and Institutional Trader Behavior after a Tick Change

Abstract

We examine how institutional stock traders alter their trading behavior after a change in the tick size. Larger size orders become more difficult to execute and are less common after the conversion to decimal pricing and a one-cent minimum price increment. These orders take far longer to execute and are broken up more often. In response to changing market conditions, institutional traders change their trading strategies. They submit smaller sized orders, trade more frequently, cancel more often, and shift more of their trading to anonymous trading venues. Our findings indicate that when a reduction in the tick size occurs, traders engage in behavior that makes the market less transparent.