There is some interesting research regarding the optimal tick size (by instrument), eg https://arxiv.org/abs/1207.6325

Well it might blow up some software not expecting these tiny tick sizes but there is an economic motive for larger tick sizes.

Traders can compete on

- price

- queue position

Small ticks mean they compete on price and big ticks mean they compete on queue position - to trade they need to have an order on the book, offering to trade at the current tick, that is ahead of other orders.

It's easy to see how the market benefits if people compete on price. However, it also benefits if people show how much they are willing to buy and sell. No sophisticated trader wants to reveal that as they will be taken advantage of when they are wrong. By having bigger tick sizes you incentivise people to try to get into the queue at these artificially better prices - it pulls liquidity into the open.

The tick size pilot that concluded in 2019 shows how this balance isn't easy to strike https://www.finra.org/rules-guidance/key-topics/tick-size-pi...

Thank you for this simple explanation.

Lowering tick size helps price discovery, but hurts open liquidity.

Is there some ideal constant average number of ticks between the bid and ask which optimizes this tradeoff given a desired state of liquidity and price discovery?

They wouldn't blow up, but if the tick size is too small there's no point in displaying orders on the book and you end up with less liquidity.