Why markets should not necessarily reduce the tick size

This paper studies the consequences of a tick size change on the Paris Bourse thus providing a natural experiment on an order-driven market. The change raised the tick size for some stocks and lowered it for other. In contrast with US exchanges results, this generated neither a reduction in liquidity provision for large trades nor a change in the spread. Based on this paper and on US results, it appears an increasing but convex relationship between the relative tick size and the relative spread. Thus, it implies that a new pricing grid does not necessarily lead to change execution costs but it changes the level of transparency in the liquidity supply. (C) 2003 Elsevier B.V. All rights reserved.