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Rethinking Decimalization The Impact of Increased Tick Sizes on Trading Activity and Volatility

In this study, we examine the trading activity and volatility of stocks influenced by the US Securities and Exchange Commission’s pilot program that increased tick sizes for various samples of stocks. The objective of the program is to examine possible improvements to the market quality of small-cap stocks, which have historically been less liquid than larger-cap stocks. Using a difference-in-difference approach, we find that, relative to control stocks, the trading activity of pilot stocks does not appear to be meaningfully affected by the increase in tick sizes. Volatility, however, increases markedly for the pilot stocks vis-à-vis other stocks. These results are robust to the different sets of pilot stocks, various rollout periods, and different control groups.