Tick Size and Spread Compression - Quant Trader Interview Question
Difficulty: Medium
Category: Market Microstructure
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Topics: tick-size, spread, queue-depth, market-microstructure, liquidity
Problem Description
A stock currently trades with a minimum tick size of 0.01 dollars and an average quoted spread of 0.03 dollars. You observe that queue depths at the best bid and offer are approximately 100 shares each. The exchange decides to reduce the minimum tick size to 0.005 dollars. Assuming no other changes in market conditions, what is the expected effect on the quoted spread and queue depth?
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