Tick Size, Competition for Liquidity Provision, and Price Discovery: Evidence from the U.S. Treasury Market

Michael Fleming, Giang Nguyen, Francisco Ruela

Research output: Contribution to journalArticlepeer-review


This paper studies how a tick size change affects market quality, price discovery, and the competition for liquidity provision by dealers and high-frequency trading firms (HFTs) in the U.S. Treasury market. Using difference-in-differences regressions around the November 19, 2018, tick size reduction in the 2-year Treasury note and a similar change in the 2-year futures eight weeks later, we find significantly improved market quality. Moreover, dealers become more competitive in liquidity provision and price improvement, consistent with the hypothesis that HFTs find liquidity provision less profitable in the smaller tick size environment. Last, we find a significant shift in short-run price discovery toward the cash market, which then reverses when the futures market tick size is reduced, suggesting that the finer pricing grid in the cash market allows traders to act on small information signals that are not profitable to exploit in the larger-tick futures market. Our findings suggest that reducing the tick size in tick-constrained and highly liquid markets like the Treasury market is on balance beneficial.

Original languageEnglish (US)
Pages (from-to)332-354
Number of pages23
JournalManagement Science
Issue number1
StatePublished - Jan 2024

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research

Cite this