This is an academic research presentation.
Authors: Dr Giuliano Graziani (Carlos III Madrid)
Dr Barbara Rindi (Bocconi University)
Dr Bart Zhou Yueshen (SMU Singapore)
Paper Abstract: We use a model of a limit order book to determine the optimal tick size set by a social planner who maximizes the welfare of market participants. Our results show that when investors arrive sequentially and supply liquidity by undercutting or queuing behind existing orders, the optimal tick size is a positive function of the asset value and a negative function of stock liquidity. Intuitively, the tick size is a strategic tool a social planner uses to optimally affect investors' choice between liquidity demand and supply, thus mitigating the inefficiencies created by excessive undercutting and queuing. The policy implication of such findings is that both the European tick size regime and the 2022 SEC proposal dominate Reg. NMS Rule 612 that formalizes the tick size regime for the U.S. markets. Using data from the U.S. and the European markets we test our model's predictions.
Erfan Ghofrani is a Financial Economist at the World Federation of Exchanges (WFE), where he conducts research on financial market structure, sustainability, and supply chain dynamics, with a focus on ESG shocks, emissions disclosure, market concentration, and IPO activity. He previously held a postdoctoral position at ESADE Business School and earned his PhD in Economics from Pompeu Fabra University, specializing in uncertainty shocks, Bayesian learning, and their impact on investment dynamics and monetary policy. Alongside his research, he has taught extensively at both undergraduate and graduate levels at ESADE, the Barcelona School of Economics, Pompeu Fabra University, and Sharif University of Technology.
Giuliano Graziani is an Assistant Professor of Finance at Universidad Carlos III de Madrid (UC3M). He earned his PhD from Bocconi University, and his research explores how frictions, market design, and regulation shape financial markets.
