Tick Size and Market Quality Using an Agent-Based Multiple-Order-Book Model

Abstract

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This study investigated the dynamics between tick size and market quality using an agent-based multiple-order-book stock-market model. Given the multiple-order-book setting, we integrated the model with small-, medium-, and large-cap stocks and conducted the analysis from both a tick-size-series and cross-sectional perspective. The simulation results showed that small-cap stocks were of the lowest quality. Furthermore, quality was generally weakened as tick-size value increased, with expanded bid-ask spreads, elevated market volatility, and reduced market efficiency.

Keywords

• tick size
• market quality
• agent-based modeling
• multiple order books
• market capitalization