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

Tzung-Yuan Hsieh (), Shaung-Shii Chuang () and Ching-Chung Lin ()
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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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2008, vol. 11, issue 04, 591-616

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.

Keywords: Binding-constraint probability; depth; market liquidity; spread; tick-size reduction; JEL Classification: G14; JEL Classification: G15 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (5)

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DOI: 10.1142/S0219091508001490

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