Tick size and market quality

We examine the impact of a reduction in minimum tick size on market quality, internalization, and member profits using a transactional database of stocks listed on the Toronto Stock Exchange (TSE) for March and May, 1996. The database identifies trading classes and purpose for each trade. We find that execution costs decline for low-priced and high-volume stocks, and we document a reduction in quoted market depth. By identifying trades that have been internalized against a member's inventory, we find that reducing tick size has a negligible impact on internalization and member profits and might result in higher commission profits.