Altering Tick Sizes, Liquidity, and Stock Return in Indonesia
DOI:
https://doi.org/10.26905/jkdp.v26i2.7402Keywords:
tick size, liquidity, stock returnAbstract
This study aimed to investigate the effect of tick-size altering on liquidity and stock return using the 2000-2018 Indonesia stock market (IDX) data. IDX was used to alter the tick size regime five times during the sample period. The results showed that a decrease in absolute tick size increases the liquidity estimated by the effective spread. The zero-return transaction frequency decreases consistently with a decrease in absolute tick size. The size also negatively impacts the abnormal stock return. Therefore, Fama-MacBeth approaches using individual firms' data show consistent results as the time series methods after controlling characteristic factors.
References
Aitken, M., & Comerton-Forde, C. (2005). Do reductions in tick sizes influence liquidity? Accounting and Finance, 45(2), 171–184. https://doi.org/10.1111/j.1467-629x.2004.00128.x
Amihud, Y. (2002). Illiquidity and stock return: Cross-section and time-series effects. Journal of Financial Markets, 5(1), 31–56. https://doi.org/10.1016/S1386-4181(01)00024-6
Anderson, H. D., & Peng, Y. (2014). From cents to half-cents and its liquidity impact. Pacific Accounting Review, 26(3), 160–176.
Asmaranti, Y., Septina, N., & Lindrianasari. (2019). Tick Size and Investor Reactions : A Study of Indonesia. Review of Integrative Business & Economics, 8(2), 273–282.
Bacidore, J., Battalio, R. H., & Jennings, R. H. (2003). Order submission strategies, liquidity supply, and trading in pennies on the New York Stock Exchange. Journal of Financial Markets, 6(3), 337–362. https://doi.org/10.1016/S1386-4181(03)00003-X
Bartlett, R. P., & McCrary, J. (2020). Subsidizing Liquidity with Wider Ticks: Evidence from the Tick Size Pilot Study. Journal of Empirical Legal Studies, 17(2), 262–316. https://doi.org/10.1111/jels.12252
Buti, S., Rindi, B., Wen, Y., & Werner, I. M. (2013). Tick Size Regulation and Sub-Penny Trading. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2324862
Chao, Y., Yao, C., & Ye, M. (2019). Why discrete price fragments U.S. Stock exchanges and disperses their fee structures. Review of Financial Studies, 32(3), 1068–1101. https://doi.org/10.1093/rfs/hhy073
Chen, Z., Huffman, A., Narayanamoorthy, G., & Zhang, R. (2021). Minimum tick size and analyst coverage: Evidence from the Tick Size Pilot Program. Journal of Business Finance and Accounting, 48(3–4), 666–691. https://doi.org/10.1111/jbfa.12499
Comerton-Forde, C., Grégoire, V., & Zhong, Z. (2019). Inverted fee structures, tick size, and market quality. Journal of Financial Economics, 134(1), 141–164. https://doi.org/10.1016/j.jfineco.2019.03.005
Corwin, S. A., & Schultz, P. (2012). A simple way to estimate bid-ask spreads from daily high and low prices. Journal of Finance, 67(2), 719–760. http://www.nber.org/public_html/confer/2009/mms09/Corwin_Schultz.pdf
Cox, J., Van Ness, B., & Van Ness, R. (2019). Increasing the Tick: Examining the Impact of the Tick Size Change on Maker-Taker and Taker-Maker Market Models. Financial Review, 54(3), 417–449. https://doi.org/10.1111/fire.12187
Curato, G., & Lillo, F. (2015). How Tick Size Affects the High-Frequency Scaling of Stock Return Distributions. In A. K. Bera (Ed.), Financial Econometrics and Empirical Market Microstructure (pp. 55–76). Springer. https://doi.org/10.1007/978-3-319-09946-0
Eaton, G. W., Irvine, P. J., & Liu, T. (2021). Measuring institutional trading costs and the implications for finance research: The case of tick size reductions. Journal of Financial Economics, 139(3), 832–851. https://doi.org/10.1016/j.jfineco.2020.09.003
Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116(1), 1–22. https://doi.org/10.1016/j.jfineco.2014.10.010
Fama, E. F., & MacBeth, J. D. (1973). Risk, Return, and Equilibrium: Empirical Tests. The Journal of Political Economy, 81(3), 607–636. https://doi.org/10.1086/260445
Griffith, T. G., & Roseman, B. S. (2019). Making cents of tick sizes: The effect of the 2016 U.S. SEC tick size pilot on limit order book liquidity. Journal of Banking and Finance, 101, 104–121. https://doi.org/10.1016/j.jbankfin.2019.01.017
Harris, L. (1991). Stock Price Clustering and Discreteness. The Review of Financial Studies, 4(3), 389–415. https://doi.org/https://doi.org/10.1093/rfs/4.3.389
La Spada, G., Farmer, J. D., & Lillo, F. (2011). Tick size and price diffusion. New Economic Windows, 9, 173–187.
Lee, C. M. C., & Watts, E. M. (2021). Tick size tolls: Can a trading slowdown improve earnings news discovery? Accounting Review, 96(3), 373–401. https://doi.org/10.2308/TAR-2018-0689
Maruyama, H., & Tabata, T. (2022). Timing of tick size reduction: Threshold and smooth transition model analysis. Finance Research Letters, 45(May), 102142. https://doi.org/10.1016/j.frl.2021.102142
Münnix, M. C., Schfer, R., & Guhr, T. (2010). Impact of the tick-size on financial returns and correlations. Physica A: Statistical Mechanics and Its Applications, 389(21), 4828–4843. https://doi.org/10.1016/j.physa.2010.06.037
O’Hara, M., Saar, G., & Zhong, Z. (2019). Relative tick size and the trading environment. Review of Asset Pricing Studies, 9(1), 47–90. https://doi.org/10.1093/rapstu/ray009
Onnela, J. P., Töyli, J., & Kaski, K. (2009). Tick size and stock returns. Physica A: Statistical Mechanics and Its Applications, 388(4), 441–454. https://doi.org/10.1016/j.physa.2008.10.014
Pan, W., Song, F. M., & Tao, L. (2012). The effects of a tick-size reduction on the liquidity in a pure limit order market: Evidence from Hong Kong. Applied Economics Letters, 19(16), 1639–1642. https://doi.org/10.1080/13504851.2011.650327
Santoso, K. B., Garry, I., & Mogie, B. (2015). The Effect of Changes in Tick Price and Lot Size on Bid-Ask Spread, Depth, Trading Volume, and Trading Time In Indonesia Stock Exchange. IBuss Management, 3(2), 451–464. http://www.capitalmarketexperts.org/wp-content/uploads/2012/10/The-Trouble-With-Small-Tick-Sizes-2-David-Weild-Edward-Kim-Lisa-Newport.pdf
Weild, D., Kim, E., & Newport, L. (2012). The Trouble with Small Tick Sizes. Grant Thornton. http://www.capitalmarketexperts.org/wp-content/uploads/2012/10/The-Trouble-With-Small-Tick-Sizes-2-David-Weild-Edward-Kim-Lisa-Newport.pdf
Xiao, X., & Yamamoto, R. (2020). Price discovery, order submission, and tick size during the pre-open period. Pacific-Basin Finance Journal, 63(April), 101428. https://doi.org/10.1016/j.pacfin.2020.101428
Yamamoto, R. (2020). Limit order submission risks, order choice, and tick size. Pacific-Basin Finance Journal, 59(December 2019), 101261. https://doi.org/10.1016/j.pacfin.2019.101261
Downloads
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
