Tick size, spread, and volume

The AMEX changed the tick size from $1/8 to $1/16 for low-price stocks on September 3, 1992. Consistent with the prediction of L. E. Harris (1994, Minimum price variations, discrete bid-ask spreads, and quotation sizes, Rev. Finan. Stud. 7, 149-178), the change has reduced both quoted and effective spreads, although the magnitude of the reduction is much smaller than predicted. However, we fail to find evidence of a significant increase in trading volume. Our cross-sectional regressions show that stocks with greater trading activity, lower prices, and stronger competition from the regional exchanges experienced greater spread reductions. Journal of Economic Literature Classification Numbers: G10, G18, G20.