  A tick size is the smallest increment of a security price. It is clear that
at the shortest time scale on which individual orders are placed the tick size
has a major role which affects where limit orders can be placed, the bid-ask
spread, etc. This is the realm of market microstructure and there is a vast
literature on the role of tick size on market microstructure. However, tick
size can also affect price properties at longer time scales, and relatively
less is known about the effect of tick size on the statistical properties of
prices. The present paper is divided in two parts. In the first we review the
effect of tick size change on the market microstructure and the diffusion
properties of prices. The second part presents original results obtained by
investigating the tick size changes occurring at the New York Stock Exchange
(NYSE). We show that tick size change has three effects on price diffusion.
First, as already shown in the literature, tick size affects price return
distribution at an aggregate time scale. Second, reducing the tick size
typically leads to an increase of volatility clustering. We give a possible
mechanistic explanation for this effect, but clearly more investigation is
needed to understand the origin of this relation. Third, we explicitly show
that the ability of the subordination hypothesis in explaining fat tails of
returns and volatility clustering is strongly dependent on tick size. While for
large tick sizes the subordination hypothesis has significant explanatory
power, for small tick sizes we show that subordination is not the main driver
of these two important stylized facts of financial market.
