Market Fairness and Efficiency: Evidence from the Tokyo Stock Exchange
62 Pages Posted: 28 Aug 2021 Last revised: 18 Oct 2021
Date Written: August 26, 2021
Abstract
In 2015 the Tokyo Stock Exchange (TSE) implemented Arrowhead Renewal improvements (ARI) that reduced latency from about one millisecond to less than 0.5 milliseconds. Simultaneously, the ARI introduced new risk management functions to improve market fairness by reducing manipulative trading strategies. We find a dramatic improvement in market fairness as proxied by marking-the-close incidents, which declined by 61.19%. We find a much smaller improvement in market efficiency. Specifically, there was a reduction in the effective (quoted) spread of 6.45% (5.79%). The most dramatic improvement in market quality (fairness and efficiency) was for low-tick-size and high-market-capitalization stocks.
Keywords: Market fairness, Market efficiency, High-frequency trading, Liquidity, Tick size, Tokyo Stock Exchange
JEL Classification: G12, G14, G15, G28
Suggested Citation: Suggested Citation