Price limit changes and market quality in the Taiwan Stock Exchange

Abstract

This study examines the relationships between price limit changes and market quality in the Taiwan Stock Exchange taking into account limit hits, order choices, and firm characteristics. Specifically, we investigate whether price limit changes affect firm-level market quality and firm-trader-level order execution quality. Our analysis yields several findings as follows. After the price limit changes, stock traders alter their order choices significantly by increasing order aggressiveness and decreasing trade size, with the firm-level market quality changing as well. In particular, both time-weighted spread and intraday volatility increase significantly, market depth decreases, and order execution quality (i.e., order duration and fill rate) is enhanced. In terms of trader types, professional investors have better order execution quality than other institutions and individuals.