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Title: Tick size change and liquidity provision on the Tokyo Stock Exchange
Authors: Ahn, Hee-Joon
Cai, Jun
Chan, Kalok
Hamao, Yasushi
Keywords: Tick size change
Quoted spread
Effective spreads
Trading volume
Monopoly rent
Issue Date: Oct-2001
Abstract: The Tokyo Stock Exchange (TSE) introduced a change in its minimum tick sizes on April 13, 1998, for stocks traded at certain price ranges. We investigate the liquidity and market quality of the stocks affected by the tick size change, using a unique and comprehensive tick-by-tick data. We find that the quoted spread (effective spread) declined significantly by 20 to 50 percent (by 24 to 60 percent) after the tick size change. Reductions in spread are greater for firms with greater tick size reductions, greater trading activity, and higher monopoly rent proportion in the bid-ask spread component. Although investors are more aggressive in posting quotes, there is no definite evidence of an increase in trading volume. Overall, our evidence is consistent with the hypothesis that price competition in the limit order book increased substantially after the tick size change.
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