On bid and ask side-specific tick sizes

TL;DR

This paper explores how having different tick sizes on the bid and ask sides of an order book can improve liquidity quality, using a model with uncertainty zones to analyze the effects.

Contribution

It introduces the concept of side-specific tick sizes and demonstrates their potential benefits for market microstructure and liquidity provision.

Findings

Side-specific tick sizes can enhance liquidity quality.

Properly chosen tick sizes on each side improve market efficiency.

Model with uncertainty zones supports the effectiveness of side-specific tick adjustments.

Abstract

The tick size, which is the smallest increment between two consecutive prices for a given asset, is a key parameter of market microstructure. In particular, the behavior of high frequency market makers is highly related to its value. We take the point of view of an exchange and investigate the relevance of having different tick sizes on the bid and ask sides of the order book. Using an approach based on the model with uncertainty zones, we show that when side-specific tick sizes are suitably chosen, it enables the exchange to improve the quality of liquidity provision.