Does tick size influence price discovery? Evidence from the Toronto Stock Exchange

We investigate the price discovery role of an exchange-traded fund and the futures contract for the same market index. We find that the fund predicts the index in the subperiod after but not in the subperiod before a substantial decrease in the minimum tick size. The futures predict the index in both subperiods. The results are consistent with the view that the factors leading to successful price discovery do not depend on zero investment, as in futures markets, but do depend on a small tick size. (C) 2003 Wiley Periodicals, Inc.