Do Reductions in Tick Sizes Influence Liquidity?

14 Pages Posted: 8 Jun 2005

See all articles by Michael J. Aitken

Michael J. Aitken

Macquarie Graduate School of Management

Carole Comerton-Forde

UNSW Business School; Financial Research Network (FIRN)

Abstract

On 4 December 1995, the Australian Stock Exchange reduced the minimum tick size for stocks priced below $A0.50 and stocks priced above $A10. We use this natural experiment to examine the impact of tick size reductions on liquidity. The present paper reports that although lower tick sizes generally lead to increased liquidity, this result is not universal. Stocks with larger relative tick sizes experience the greatest improvement in liquidity, while stocks with small relative tick sizes and low trading volume experience reduced liquidity. There is no change in order exposure as a result of the reduced tick sizes.

JEL Classification: G10, G15

Suggested Citation

Aitken, Michael J. and Comerton-Forde, Carole, Do Reductions in Tick Sizes Influence Liquidity?. Accounting and Finance, Vol. 45, No. 2, pp. 171-184, July 2005. Available at SSRN: https://ssrn.com/abstract=729466

Michael J. Aitken (Contact Author)

Macquarie Graduate School of Management ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Carole Comerton-Forde

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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