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The Impact of Tick Size Reduction on Liquidity and Order Strategy : Evidence from the Jakarta Stock Exchange (JSX)

Author

Listed:
  • Irwan Adi Ekaputra

    (Faculty of Economics, University of Indonesia MM-UI)

  • Basharat Ahmad

    (PT. Bank Mandiri (Persero), Tbk, Jakarta)

Abstract

On January 3, 2005, the Jakarta Stock Exchange (JSX) implemented a new tick size of Rp10 in addition to the existing Rp5, Rp25, and Rp50 tick sizes. This new tick size affects shares within Rp500-Rp2000 price range, for these shares were previously traded with Rp25 tick size. The main purpose of adding this new tick size is to boost liquidity, especially for shares within the aforementioned range. Using daily data, t-tests, and cross-sectional multiple regressions, this study finds the new policy significantly reduces relative bid-ask spread, but also lessens bid and ask depth. From the aspects of width and immediacy cost, stock liquidity is enhanced; but from the viewpoint of bid and ask depth, stock liquidity is diminished. To resolve the two contradictory results, we use the ratio of average depth to relative spread (DRS). The new tick size does not trim down DRS significantly, or it does not diminish total liquidity. Furthermore, with smaller relative spread, our findings confirm traders’ tendency to change their strategy from using limit orders to market orders, and to split their orders into smaller quantities

Suggested Citation

  • Irwan Adi Ekaputra & Basharat Ahmad, 2007. "The Impact of Tick Size Reduction on Liquidity and Order Strategy : Evidence from the Jakarta Stock Exchange (JSX)," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 55, pages 89-104, April.
    • Handle: RePEc:lpe:efijnl:200705
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    Citations

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    Cited by:

    1. Syamsul Idul Adha & A. Sakir, 2021. "Effect of Minimum Tick Size Policy on Price Efficiency and Execution Cost," Capital Markets Review, Malaysian Finance Association, vol. 29(2), pages 29-41.
    2. Irwan Adi Ekaputra & Erni Sukmadini Asikin, 2012. "Impact of Tick Size Reduction on Small Caps Price Efficiency and Execution cost on the Indonesia Stock Exchange," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 8(Supp. 1), pages 1-12.

    More about this item

    Keywords

    Jakarta Stock Exchange; market microstructure; tick size; liquidity; bid-ask spread;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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