Tick size and price efficiency: Further evidence from the Tick Size Pilot Program

This paper examines whether larger tick sizes improve or hinder price efficiency for small-capitalization stocks using data from implementing and terminating the Tick Size Pilot Program (TSPP). We show that the TSPP led to increases in various liquidity measures, and its termination restored them to their pre-TSPP levels. We also find evidence that the TSPP led to trader migration from the pilot to control stocks. The TSPP implementation (termination) is associated with decreases (increases) in price efficiency, indicating that price efficiency decreases with tick sizes. Liquidity and informed trading are two channels through which the TSPP changes price efficiency.