Lot Size Constraints and Market Quality: Evidence from the Borsa Italiana

Financial Management, Vol. 44, Issue 4, pp. 905-945, 2015

WBS Finance Group Research Paper No. 146

67 Pages Posted: 21 Oct 2010 Last revised: 23 Dec 2019

See all articles by Arie Eskenazi Gozluklu

Arie Eskenazi Gozluklu

University of Warwick

Pietro Perotti

University of Bath - School of Management

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin

Roberta Fredella

Bocconi University

Date Written: June 12, 2015

Abstract

Trading venues often impose a minimum lot size (minimum trade unit [MTU]) to facilitate order execution. We document changes in market quality associated with the reduction of the MTU to one share on the Italian stock exchange, the Borsa Italiana. We observe a substantial improvement in liquidity, with an average decrease in the relative spread of 10.2%, and more significant improvements for those firms for which the MTU constraint was more binding. We also show that the improvement in liquidity is mainly driven by a reduction in adverse selection; that informational efficiency is not significantly affected; and there is an increase in retail trading. We interpret our findings in light of a model of asymmetric information in which the MTU affects traders’ choice of order size.

Keywords: minimum trade unit constraint, limit order book, market liquidity, adverse selection costs

Suggested Citation

Gozluklu, Arie Eskenazi and Perotti, Pietro and Rindi, Barbara and Fredella, Roberta, Lot Size Constraints and Market Quality: Evidence from the Borsa Italiana (June 12, 2015). Financial Management, Vol. 44, Issue 4, pp. 905-945, 2015 ; WBS Finance Group Research Paper No. 146. Available at SSRN: https://ssrn.com/abstract=1693848

Arie Eskenazi Gozluklu

University of Warwick ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

HOME PAGE: http://www.arieskenazi.com

Pietro Perotti (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://www.bath.ac.uk/management/faculty/pietro-perotti.html

Barbara Rindi

Bocconi University and IGIER and Baffi Carefin ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 58365328 (Phone)

HOME PAGE: http://faculty.unibocconi.eu/barbararindi

Roberta Fredella

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

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