The tick size, representing the minimum price increment in a financial market, can influence pricing efficiency. We examine its role in price discovery between futures and options in the Chicago Mercantile Exchange corn and soybean markets. Futures markets have a tick size twice that of options, often resulting in one-tick quoted spreads. This limits traders’ ability to improve the best bid or offer price, reducing their capacity to incorporate information into the price. With less tick size constraint and despite thin and costly trading, we find that options are more informative than futures on average. Price-improving quotes from options traders enhance information impounded into prices, suggesting that an unconstrained tick size may enhance price discovery. Our study suggests that a “tight spread and deep depth” may not represent universally optimal market microstructure settings.
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