Removing the Trade Size Constraint? Evidence from the Italian Market Design

Arie E. Gozluklu, Pietro Perotti, Barbara Rindi () and Roberta Fredella

No 493, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Trading venues often impose a minimum trade unit constraint (MTUC) to facilitate order execution. This paper examines the effects of a natural experiment at Borsa Italiana where the exchange reduced the MTUC to one share for all stocks. After the removal of the MTUC, we observe a substantial improvement in liquidity, measured by a decrease in the bid-ask spread and an increase in market depth. The cross-sectional evidence shows that those firms for which the MTUC was more binding benefit the most from the microstructure change. These findings are consistent with a model of asymmetric information in which the MTUC affects traders’ choice of order size. As the model predicts, liquidity improves following the reduction in adverse selection costs. KEYWORDS: minimum trade unit constraint, limit order book, market liquidity, adverse selection costs

Date: 2013
New Economics Papers: this item is included in nep-eur, nep-ipr, nep-pr~, nep-lam, nep-ltv, nep-mst and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.unibocconi.it/igier/igi/wp/2013/493.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:igi:igierp:493

Ordering information: This working paper can be ordered from
https://repec.unibocconi.it/igier/igi/

Access Statistics for this paper

More papers in Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University via Rontgen, 1 - 20136 Milano (Italy).
Bibliographic data for series maintained by ().