TICK SIZE DEBATE AND ALGORITHMIC TRADING
A new study by CMCRC researchers suggests that companies may be able to influence the level of algorithmic trading (AT) by adjusting their price level. The research shows that, stocks with lower relative tick size experience faster cancelation, deletion or trade times and higher order to trade ratios vis-à-vis firms with larger relative ticks. The research suggests stocks with a smaller relative tick size attract more AT and conversely a firm may limit the proportion of AT in their stock by undertaking a stock split which will increase a firm’s relative tick and the cost of price improvement to be offered by AT.The research by Tony Zhang and Dr Vito Mollica from MGSM evaluates the relationship between relative tick size and AT activity around stock split and re-capitalisation events, providing a natural experiment to evaluate AT behaviour around non-mandated tick size changes. The tick size of a company, is set in Australia by the market regulator, ASIC. The minimum tick, at its minimum sets compensation for market makers, it also sets the minimum price improvement cost for a trader to get ahead in the limit order book. The study investigates two AT proxies, ‘order-to-trade ratio’ and ‘order resting time’ to see how they change when a stock’s relative tick size changes after a stock capitalisation event. The study uses evidence from 131 stock split/consolidations events between 1996 and 2012, where the relative tick size at least halved or doubled. The study finds during the AT active period (2005-2012) that the order-to-trade ratio (calculated by dividing the total number of orders traded, deleted or amended by total dollar turnover) increases significantly when a share moves from a large relative tick size to a smaller one. Conversely, in the pre AT trading environment (1996-2004), firms which significantly altered their price level and corresponding relative tick (via a stock split or consolidation) did not have increases in order-to- trade ratios. A large order-to-trade ratio means that more orders are required to complete a dollar value trade. Similarly, order resting time (the time each order stays on the system before it is traded or deleted) is reduced as a firm moves to a lower relative tick level. If AT’s is influenced by tick size, one implication of this research is that a listed firm may potentially be able to influence the trading behaviour in their stock, without the need for a change in regulation.