The Analyses of the Effects of Tick Size on Market Quality, Liquidity Provision, and Price Clustering
(minimum price variation, tick size)對於市場品質和流動性提供的影響。理論研究
首先採取和Ahn, Cao, and Choe (1996) and Bessembinder (2003)相同的觀點，著眼
說(price resolution hypothesis)所述，對於真實均衡價格之解析度有限，因而採用
The minimum price variation (tick size) mandated by exchange restricts the quote prices to fall on a discrete grid and limits the prices at which a trade can take place. Theories suggest that the change in the tick size may significantly affect market quality. Empirical researches have found declined bid-ask spreads and reduced market depth after the exchanges adopt a smaller tick size. However, evidence is mixed regarding the effect of a finer price grid on volume, volatility, and other variables. This three-year project conducts a comprehensive study for the effect of tick size on the Taiwan stock market. The first-year study focuses on the impact of tick size changes on market quality, where market quality may be assessed by quoted bid-ask spread, effective bid-ask spread, quoted depth, trading volume, and intraday volatility. Similar to Ahn, Cao, and Choe (1996) and Bessembinder (2003), the investigation primarily centers on whether changes in tick sizes reduce costs of trading stocks. The study will perform several tests including the comparison of market quality for stocks in different tick size groups, the before-versus-after examination of stocks that pass through a particular tick size threshold, and a preversus post-event test of market quality surrounding the market-wide adjustment in tick sizes. In the second year, the research investigates liquidity provision under different tick sizes. The study uses a variety range of variables and methodologies to assess the willingness of liquidity provision, including the quoted depth, depths away from the inside quotes, the frequency of quote revision, and the intraday price variation/reversals that reflect the extent to which quoted depth is consumed by liquidity demanders (market orders). The study also reveals the extent to which a finer price grid enhances the competition of liquidity provision and therefore, reduces the profits of limit-order strategy. Finally, by assessing realized costs for traders who submit market orders in exceed of the depths of prevailing quotes, the study sheds light on whether tick size reduction benefits all liquidity providers/demanders or only some. In the last year, this proposal will link the minimum price variation to the study of price clustering. Price clustering indicates the tendency for asset prices (trade or quote) to occur more often at certain fractions or integers (e.g., 0 and 5) than the others. According to the price resolution hypothesis, price clustering may arise because traders can only resolve prices to coarser price grids than the minimum tick size. Tick size restricts the finest price resolution can be obtained. If tick size is binding (too large) for finer price discovery, there should be no significant price clustering across all available price grids. In that case, a smaller tick size would allow trades and quotes to take place on more possible price grids, which, in term, leads to greater price clustering. The study views the price clustering as the needs for finer price grids and better price discovery. The impacts of tick size on trade and quote price clustering are examined by comparing measures of price clustering across tick size categories as well as before and after the changes of tick-size rule.
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