In January 2018, common European rules were introduced for tick sizes for shares, ie the minimum allowed price change for a specific share. Overall, the rules for tick sizes seem to have worked as intended, but there are also indications that tick sizes may advantageously be reduced for the most liquid shares according to a new analysis from the Danish FSA.
The Danish FSA has analysed the importance of the common European tick size rules for the Danish stock market. This comprised an investigation of the overall costs of buying and then selling a stock position. The analysis was prepared for amounts up to DKK 500,000.
The objective of the common European rules for tick sizes is to ensure that the trading venues do not use reduction of tick sizes as a competition parameter as this may be detrimental to the market.
The level of tick sizes in the EU rules is determined considering that, on the one hand, it should not be so high as to inflict unnecessary costs on the investors trading shares, whereas, on the other hand, it may be detrimental to the market if tick sizes are too low. However, it is a difficult task as the optimal tick size differs from one share to the other, depending, among other things, on the market and the liquidity of the share.
“The change from the old tick sizes on Nasdaq Copenhagen to the new common European tick sizes have, in general, had no or only minor impact on the transaction costs in Danish shares when considering trades below DKK 500,000. This applies to both the liquid large cap shares and the less liquid small and mid cap shares”, says Anders Balling, Assistant Director General at the Danish FSA.
”Our analysis shows that the common European tick sizes generally are well suited for the Danish share market. However, there are indications that tick sizes may advantageously be reduced for the more liquid Danish shares as this may result in lower transaction costs”, Anders Balling adds.
Please find the analysis here.
The Danish FSA has assessed the tick size rules due to the coming review of MiFID II (Markets in Financial Instruments Directive II). In Denmark, the new rules had the effect that the tick size was increased for some shares, whereas for other shares it was unchanged or reduced.