Tick size change and liquidity provision on the Tokyo Stock Exchange

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

23 Scopus Citations
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Author(s)

  • Hee-Joon Ahn
  • Jun Cai
  • Kalok Chan
  • Yasushi Hamao

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)173-194
Journal / PublicationJournal of the Japanese and International Economies
Volume21
Issue number2
Publication statusPublished - Jun 2007

Abstract

The Tokyo Stock Exchange (TSE) introduced a change in its minimum tick sizes on April 13, 1998, for stocks traded at certain price ranges. We investigate the liquidity and market quality of the stocks affected by the tick size change, using a unique and comprehensive tick-by-tick data. We find that the quoted spread (effective spread) declined significantly by 20 to 50 percent (by 24 to 60 percent) after the tick size change. Reductions in spread are greater for firms with greater tick size reductions, greater trading activity, and higher transitory component in the bid-ask spread. Although investors are more aggressive in posting quotes, there is no definite evidence of an increase in trading volume. Overall, our evidence is consistent with the hypothesis that the minimum tick size creates economic rents for liquidity providers, which is lowered upon tick size reduction. J. Japanese Int. Economies 21 (2) (2007) 173-194. © 2005 Elsevier Inc. All rights reserved.

Research Area(s)

  • Effective spreads, Monopoly rent, Quoted spread, Tick size change, Trading volume