The Impact of Tick Size on High Frequency Trading : The Case for Splits

Listed companies and institutional investors have called on market regulators to introduce mechanisms to curb high-frequency (HF) trading in financial markets. In this paper we suggest relative tick size is one such mechanism. We investigate for a non-fragmented market two HF trading proxies: order to trade ratio and order resting time, and how it changes around stock splits and reverse splits, exogenous events which significantly impact a firm's relative tick size. We find that when a security undergoes a stock split and experiences a sudden increase in its relative tick size, it is associated with a lower order-to-trade ratio and longer order resting time, indicative of lower levels of HF trading. The reverse is true of reverse splits, HF traders prefer to trade in firms with smaller relative ticks, as the marginal cost of getting ahead in the limit order book decreases. Such behaviour is not observed in our matched sample of control firms or in a pre-HF trading environment