In the two-and-a-half months since the launch of the long-anticipated Tick Size Pilot for small-cap U.S. stocks, some trends are beginning to emerge in the data. Overall, the pilot has resulted in wider spreads (which tend to raise trading costs) and more available liquidity, as measured by the depth of the top of the order book.
In Chart 1 we see that stocks with the lowest pre-pilot spreads have seen the biggest increases in both spread and top-of-book depth, with spreads almost doubling and depth increasing by about 5x-7x. The impact has been more muted in stocks with pre-pilot spreads greater than $0.05.
Chart 1: % change in spreads and top of book depth across pre-pilot spread groups
In Chart 2 we can see the impact of phasing in stocks tick pilot participation across the first few weeks of the pilot. Top-of-book depth has increased most dramatically for stocks in group two, which requires quoting and trading in $0.05 increments. The increase in available liquidity is smaller for group three, which requires the same nickel increments but also includes a trade-at provision in the pilot.
Chart 2: Weekly trends in top of book depth (September 4 – December 2)
In Chart 3 we see that groups one and two experienced an almost identical widening in spreads as the tick pilot rollout progressed, with group three catching up as those stocks were added in. It is interesting to note that the spreads for group three stocks began to widen on October 9, a full three weeks before any of those stocks were added to the pilot.
Chart 3: Weekly trends in spread (September 4 – December 2)
While the Tick Size Pilot is scheduled to run through early October of 2018, it will be interesting to see if some of these early trends continue as the pilot progresses, particularly the strong increase in top-of-book depth for groups two and three. ITG Analytics will continue to measure the impact of the Tick Size Pilot using data and insights from the ITG Peer Database, which collects transactions from more than 200 asset managers worldwide.
