Abstract electronic
Market Infrastructure

More Ticks, More Messages

Today we look at an unintended consequence of having too many ticks —more message traffic.

We find that for the same stock, a more granular (“too many ticks”) regime could dramatically increase the amount of message traffic. And that wouldn’t be great for active traders or industry-wide infrastructure costs.

Looking at stocks that have similar spreads and liquidity

As we know, the perfect stock price trades with a spread that is around 2 ticks wide.

But in an effort to fix the tick-constrained problem, it’s possible some ticks would end up with many more ticks than they have now.

To test what might happen to message traffic, we looked for stocks with very similar trading characteristics: similar liquidity (value traded) and market cap, all Nasdaq listed, and even similar spreads (in basis points). 

We then separated these stocks by share prices and searched for stocks where, mathematically, the economic cost of crossing a spread is the same. We formed three groups where the spread cost averages around 10 basis points (bps):

  1. A $10 stock with a 1-cent spread (1/1,000 cents = 0.001%) has a 10bps spread cost
  2. A $50 stock with a 5-cent spread (5/5,000 cents = 0.001%) has a 10bps spread cost
  3. A $100 stock with a 10-cent spread (10/10,000 cents = 0.001%) has a 10bps spread cost

Importantly, although these stocks have the same spread costs, there are a different number of ticks inside their typical NBBO, with the second group typically trading 5 ticks wide and the third group trading 10 ticks wide. 

Another way to think about this would be to ask: What would happen if we got “right priced” stocks that trade around 1-2 ticks wide now and split their tick into fifths or tenths of a cent?

We then looked at what the typical message traffic was in each group.

Chart 1: For stocks with the same spread in basis points, message traffic increases if you add more ticks in between the NBBO

For stocks with the same spread in basis points, message traffic increases if you add more ticks in between the NBBO

Our data suggests that stocks with 5 ticks inside the NBBO have roughly double the message traffic of a tick-constrained stock. While stocks with 10 ticks between the NBBO have more than triple the message traffic.

More messages might add to industry-wide costs

More messages make it harder for algorithms to keep up with live prices and order flow across the portfolio of orders being worked. Eventually, increased message traffic also raises the hardware needs of everyone in the industry, perhaps raising costs unnecessarily.  

Very high message traffic also increases latency in busy (or “fast”) markets, as the ports and wireless networks are capped in how many messages they can transmit per millisecond

Our results also point to the potential “overbidding,” or pennying, in a market with too many ticks.

As regulators and the industry weigh new tick regimes, this has implications for infrastructure capacity and resiliency. It suggests having too many ticks inside each NBBO could raise costs unnecessarily for everyone.

We still need to weigh messages costs against trading costs

To be clear, this is NOT an argument in favor of tick-constrained stocks. Lots of research shows that those stocks have higher transaction costs, which more than outweigh message traffic costs. 

There is also evidence that more quote traffic can mean tighter pricing and lower transaction costs.

There is a trade-off – which we see in the U-shape that spreads naturally form where both low-priced and high-priced stocks have higher spreads than necessary. 

The trick is to find the balance between not enough ticks and too many ticks. 

The data is out there. A number of different studies have found a spread around 2 ticks wide is optimal, and that optimal spreads reduce costs of capital for issuers and increase stock returns for investors.

That’s a cost-benefit that makes sense. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Phil Mackintosh


Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

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