Large tick assets: implicit spread and optimal tick size

TL;DR

This paper introduces the concept of implicit spread for large tick assets, linking microstructure properties to optimal tick size and enabling better forecasting and adjustment of tick values.

Contribution

It defines the implicit spread as a new parameter for large tick assets and proposes a framework to determine and optimize tick size based on this measure.

Findings

Implicit spread effectively characterizes large tick assets.

The framework allows forecasting market behavior after tick size changes.

Optimal tick size can be identified to improve market microstructure.

Abstract

In this work, we provide a framework linking microstructural properties of an asset to the tick value of the exchange. In particular, we bring to light a quantity, referred to as implicit spread, playing the role of spread for large tick assets, for which the effective spread is almost always equal to one tick. The relevance of this new parameter is shown both empirically and theoretically. This implicit spread allows us to quantify the tick sizes of large tick assets and to define a notion of optimal tick size. Moreover, our results open the possibility of forecasting the behavior of relevant market quantities after a change in the tick value and to give a way to modify it in order to reach an optimal tick size.