Tick size, liquid stocks and market quality: Evidence from a natural experiment in a unique setting

Abstract

We study the causal impacts of a tick size reduction policy in highly liquid stocks, exploiting a unique experiment in Borsa Istanbul leading to substantial exogenous variation in the tick size. Adapting a differences-in-differences strategy with a novel limit order and trade book data with intraday calculations, we find evidence that the tick size reduction improves market quality for the liquid stocks by significantly lowering quoted, effective, and realized spread yet reducing the depth at the best bid offer and aggregate depth. Moreover, results indicate a lower price impact for the treated stocks while there is no significant impact on trading volume, however, the number of trades increases but trade and order sizes get smaller significantly. Estimates show null effects on the submission of market orders, volatility, and returns. Our study departs from the existing literature with no dark pool trading and internalization of orders in the Turkish Stock Markets.