Tick size change and liquidity provision for Japanese stock trading near ¥1000

Abstract

Bessembinder [Bessembinder, H., 2000. Tick size, spreads, and liquidity: an analysis of NASDAQ securities trading near ten dollars, Journal of Financial Intermediation 9, 213–239] examines the effect of tick size changes from US$ 1/32 to US$ 1/8 on NASDAQ stocks when the stock prices pass US$ 10. In contrast with NASDAQ, the Tokyo Stock Exchange (TSE) strictly enforces the price and time precedence rule. The TSE is also one of the largest limit-order markets using a tick size that is a step function of share price. The threshold, at ¥1000, is the most important among several other price levels. The minimum tick size increases from ¥1 to ¥10 when stock prices rise from below ¥1000 to above ¥1000. This large change in tick size and its effects on market quality have interested researchers for a long time [Amihud, Y., Mendelson, H. 1991. Volatility, efficiency and trading: evidence from the Japanese stock market, Journal of Finance 46, 1765–1789; Harris, L., 1994. Minimum price variations, discrete bid-ask spreads, and quotation sizes, Review of Financial Studies 7, 149–178], but they have never been examined. This study considers the impact of the change in minimum tick size on liquidity provisions as TSE stock prices cross the ¥1000 threshold. The empirical results provide some new insights regarding the effects of endogenous tick size changes.