Should tick size of high price stock be increased? An experimental study in an artificial stock market

This paper analyzed the effect of tick size change at different stock price levels on market quality by simulation. First, we built an artificial stock market within parameters of actual trade mechanism and trade behavior. In order to imitate bounded rationality of investors and heterogeneousness of transaction motive, we improved the three factors expectation model of mixed trade strategy, and designed the value function of traders based on the Prospect Theory, as well as the update model of risk preference and transaction willingness depending on previous trade performance. Then, repetitive simulation experiments on different tick size of three various stock price levels were executed. The result shows that unlike relatively low price stock, tick size increase for high price stock can enhance market quality notably, which is shown as significant enlargement of trade volume and market efficiency, in spite of spread increasement. Thus, we suggest that flexible tick size according to stock price should be adopted in Chinese stock market, which means an appropriate increase of tick size for high price stock.