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Impact of the Change in Tick Size on Transaction Costs and Liquidity: An Empirical Investigation of the Taiwan Stock Exchange *
Author(s) -
Kuo SuWen,
Huang ChinSheng,
Chen ChiaCheng
Publication year - 2010
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2010.01020.x
Subject(s) - tick size , market liquidity , stock exchange , transaction cost , business , stock (firearms) , monetary economics , economics , financial economics , econometrics , finance , geography , archaeology
Abstract The minimum price variation on the Taiwan Stock Exchange reduced for most price categories on March 1, 2005. The present paper simultaneously examines the institutional and endogenous impacts of tick size changes on transaction costs, market liquidity, and trading activity. The empirical evidence suggests that following a reduction in tick size, uniform declines are discernible in transaction costs and market liquidity. In particular, those stocks with a larger relative tick size reduction, higher trading volume, and higher order handling cost components have greater reductions in spread and market depth. Moreover, endogenous tick size reductions have an adverse effect on the trading activity for low‐price stocks, due to the relative disadvantage in explicit transaction costs. Finally, the present study observes a general diminution in trade size resulting from a reduction in tick size in the Taiwan Stock Exchange. This study attributes plausible rationales to the fact that after tick size reductions, informed traders employ a smaller trade size to hide private information, or front‐runners place a smaller trade size to avoid market turbulence.