Open AccessTick Size and Informed Trading: Evidence from the Taiwanese Stock Market
Author(s) -
Chang-Wen Duan,
Ken Hung,
Shinhua Liu
Publication year - 2021
Publication title -
international business research
Language(s) - English
Resource type - Journals
eISSN - 1913-9012
pISSN - 1913-9004
DOI - 10.5539/ibr.v15n1p1
Subject(s) - adverse selection , tick size , market liquidity , volatility (finance) , order (exchange) , business , stock market , financial economics , stock (firearms) , economics , trading strategy , monetary economics , microeconomics , finance , mechanical engineering , paleontology , horse , biology , engineering
We adopt the Sandås model for order-book equilibrium to examine informed trading on the Taiwanese stock market, a purely order-driven call-auction market. We find that adverse-selection cost is low for well-known stocks with high liquidity and low volatility, but cost is high for monitoring the order books of those stocks. Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis. Finally, with the special tick size rules on the market, both adverse-selection cost and monitoring cost decline as tick size decreases.