medium · Market Microstructure lob
How does the minimum tick size affect the 'free option' problem for limit order traders?
- A smaller tick makes limit orders easier to 'pick off' once fresh news arrives in the market.
- A larger tick size lowers the value of the embedded free option held against the quote.
- A smaller tick size allows 'penny jumping,' discouraging traders from providing liquidity.
- Tick size has essentially no bearing on the economic value carried by resting limit orders.
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