We thank an anonymous referee, Amy Edwards, Jeff Harris, and William T. Moore (the editor) for excellent suggestions that improved the paper and S. Q. Kang for research assistance. The opinions expressed herein reflect only those of the authors. We are solely responsible for any errors or omissions.
LIQUIDITY AND QUOTE CLUSTERING IN A MARKET WITH MULTIPLE TICK SIZES
Article first published online: 25 APR 2005
Journal of Financial Research
Volume 28, Issue 2, pages 177–195, June 2005
How to Cite
Chung, K. H., Kim, K. A. and Kitsabunnarat, P. (2005), LIQUIDITY AND QUOTE CLUSTERING IN A MARKET WITH MULTIPLE TICK SIZES. Journal of Financial Research, 28: 177–195. doi: 10.1111/j.1475-6803.2005.00120.x
- Issue published online: 25 APR 2005
- Article first published online: 25 APR 2005
We analyze market liquidity (i.e., spreads and depths) and quote clustering using data from the Kuala Lumpur Stock Exchange (KLSE), where the tick size increases with share price in a stepwise fashion. We find that stocks that are subject to larger mandatory tick sizes have wider spreads and less quote clustering. We also find that liquidity providers on the KLSE do not always quote larger depths for stocks with larger tick sizes. Overall, our results suggest that larger tick sizes for higher priced stocks are detrimental to market liquidity, although the adverse effect of larger tick sizes is mitigated by lower negotiation costs (i.e., less quote clustering).