So who gains from a small tick size?

We investigate the relation between price discreteness and the number of dealers in a dealer market. We present a model featuring a finite number of dealers competing in prices for supplying liquidity to a forthcoming market order. We find that a decrease in tick size benefits dealers and tends to hurt investors when the number of dealers for a stock is small. In contrast, a decrease in tick size hurts dealers and benefits investors when the number of dealers is large. This result yields several new empirical implications relating a change in tick size to entry and exit of dealers, order aggressiveness and transaction rates.