Abstract
On January 3, 2005, the Jakarta Stock Exchange (JSX) implemented a new tick size of Rp10 in addition to the extant Rp5, Rp25, and Rp50 tick sizes. This new tick size affects shares within Rp500-Rp2000 price range, for these shares were previously traded with Rp25 tick size. The main purpose of adding this new tick size is to boost liquidity, especially for shares within the aforementioned range. Using daily data, t-tests, and cross-sectional multiple regressions, this study finds the new policy significantly reduces relative bid-ask spread, but also lessens bid and ask depth. From the aspects of width and immediacy cost, stock liquidity is enhanced; but from the viewpoint of bid and ask depth, stock liquidity is diminished. To resolve the two contradictory results, we use the ratio of average depth to relative spread (DRS). The new tick size does not trim down DRS significantly, or it does not diminish total liquidity. Furthermore, with smaller relative spread, our findings confirm traders' tendency to change their strategy from using limit orders to market orders, and to split their orders into smaller quantities.
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