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Impact of Tick-Size Reduction on the Market Liquidity — Evidence from the Emerging Order-Driven Market

Author

Listed:
  • Tzung-Yuan Hsieh

    (Department of Business Administration, National Cheng Kung University, Taiwan, 1, University Road, Tainan, Taiwan 701, Taiwan)

  • Shaung-Shii Chuang

    (Department of Business Administration, National Cheng Kung University, Taiwan, 1, University Road, Tainan, Taiwan 701, Taiwan)

  • Ching-Chung Lin

    (Department of Business Administration, Kao Yuan University, Taiwan 1821, Chong-Shan Road, Lujhu Township, Kaohsiung County, Taiwan 821, Taiwan)

Abstract

Empirical studies on the influence of tick-size reduction towards market liquidity have focused almost exclusively on quote-driven markets in developed nations, and generally their findings are based on time periods of less than one year. This work investigates the influence of tick-size reduction and the relaxations of binding-constraint probability on market liquidity in the Taiwanese stock market, an emerging order-driven market, starting on March 1, 2005. The empirical results show that the spread, depth, market liquidity, and binding-constraint probability all decrease following the tick-size reduction, especially for low-priced stocks. These results can be attributed to relaxation of binding constraints. Additionally, stocks that are frequently traded, have larger market capitalization, or have restrictive binding constraints, experience considerable declines in spread, depth, and market liquidity following tick-size reduction. Trading activity plays an important role in explaining changes in spread, depth, market liquidity, and binding constraints. Thus, tick-size reduction in the Taiwanese Stock Market can increase market efficiency and reduce the investors' trading costs.

Suggested Citation

  • Tzung-Yuan Hsieh & Shaung-Shii Chuang & Ching-Chung Lin, 2008. "Impact of Tick-Size Reduction on the Market Liquidity — Evidence from the Emerging Order-Driven Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 11(04), pages 591-616.
    • Handle: RePEc:wsi:rpbfmp:v:11:y:2008:i:04:n:s0219091508001490
    DOI: 10.1142/S0219091508001490
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    Citations

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    Cited by:

    1. Mike Derksen & Bas Kleijn & Robin de Vilder, 2020. "Effects of MiFID II on stock price formation," Papers 2003.10353, arXiv.org, revised Aug 2020.
    2. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013, January-A.
    3. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.

    More about this item

    Keywords

    Binding-constraint probability; depth; market liquidity; spread; tick-size reduction; JEL Classification: G14; JEL Classification: G15;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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