The Impacts of Minimum Trading Units and Tick Size Changes on Bid-ask Spread, Depth, and Trading Volume: Evidence from the Indonesia Stock Exchange

Abstract

Purpose – This research aims to analyze the differences in the bid-ask spread, depth, and trading volume after a new tick size and minimum trading unit policy were imposed by the Indonesian Stock Exchange (IDX) on January the 6th, 2014.

Design/Methodology/Approach – This research is exercised on the three variables of liquidity, i.e. the bid-ask spread, the depth, and the trading volume. This research used a paired difference test to measure the impact before and after the policy was imposed.

Findings – The results showed that the smaller the tick size, the greater the average decrease of the bid-ask spread, ask depth, and bid depth, but the trading volume did not show a significant average difference.

Research Implications – The tick size reduction was consistent and supported the previous research from different countries. The bid-ask spread, ask depth, and bid depth significantly decreased, and the trading volume had a tendency to increase as well, although it was not significant.

Results are aimed at the IDX and Bapepam as additional information related to the changes that occurred as a result of the implementation of the new policy in stock trading. Investors can use the information from this study to make investment decisions.

Keywords: bid-ask spread, depth, tick size, volume

JEL Classification: G11, G12, G14, G18