Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View




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    • Lehmann is from the Graduate School of International Relations and Pacific Studies at the University of California, San Diego. Modest is from the Walter A. Haas School of Business at the University of California, Berkeley. We are very grateful to Nikko Securities and the Tokyo Stock Exchange for making this data available to us and Tony Azuma and Hiroshi Koizumi, of Nikko Securities, for superb research assistance. We would also like to thank Takeshi Hirano, Shunzo Kayanuma, and Yutaka Fugii of the Tokyo Stock Exchange for enhancing our understanding of the Tokyo Stock Exchange trading mechanism and Richard Lindsey for comments on an earlier draft.


The trading mechanism for equities on the Tokyo Stock Exchange (TSE) stands in sharp contrast to the primary mechanisms used to trade stocks in the United States. In the United States, exchange-designated specialists have affirmative obligations to provide continuous liquidity to the market. Specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions. In contradistinction, the TSE has no exchange-designated liquidity suppliers. Instead, liquidity is provided through a public limit order book, and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading. In this article, we examine the efficacy of the TSE's trading mechanisms at providing liquidity. Our analysis is based on a complete record of transactions and best-bid and best-offer quotes for most stocks in the First Section of the TSE over a period of 26 months. We study the size of the bid-ask spread and its cross-sectional and intertemporal stability; intertemporal patterns in returns, volatility, volume, trade size, and the frequency of trades; and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes.