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It contributes to liquidity in that it allows market makers to quote tighter prices, since they have less risk of adverse selection.

Increasing the tick size hurts high frequency trading by making it costlier to rapidly enter and exit positions.

Not really - a lot of HFT earns money from liquidity provision, where a higher tick value would increase profitability, since they're entering and exiting trades passively attempting to earn the bid/ask spread.

> What is going on?

Regulatory capture is my bet.