Tick Size Research Articles

Stock Splits in Switzerland: To Signal or Not to Signal?

In Switzerland, the existence of a mandatory minimum par value inhibited many companies from splitting their stocks as they already traded at their minimum par value. These Swiss companies could split their stocks only after the legal minimum par value was lowered in July 1992 and again in May 2001. These two events provide rare opportunities to distinguish between stock splits that signal a permanent increase in stock price and splits that are merely a reaction to a regulatory change and thus have other motives. The significant return differences between the two samples are in line with the hypothesis that splits are a means to send positive signals to the stock market. Furthermore, while trading volumes remained largely unaffected after stock splits, relative tick sizes generally increased after a stock split, and bid‐ask spreads often increased after a stock split.

Decimalization, Realized Volatility, and Market Microstructure Noise

This paper carefully examines the effect of decimalization on volatility and market microstructure noise. We apply several nonparametric estimators in order to accurately measure volatility and market microstructure noise variance before and after the final stage of decimalization which, on the NYSE, took place in January, 2001. We findn that decimalization decreased observed volatility by decreasing noise variance and, consequently, increased the significance of the true signal especially in trade price data for the highly active Dow Jones stocks. This study also reveals some differences between volatility and noise variance estimators’ capability to handle changes in tick size and strategic order placing that are relevant in the evaluation of the decimalization effects. The ability of the realized kernel estimator to adapt to more complex data dependency than the traditional realized volatility estimator is useful. The two-scale and multi-scale realized volatility estimates turn out to be more variable especially with midquote data where a couple of outlying dates affect their volatility estimates and consequently the test results in a significant way.

The dynamics of quote adjustments

Liquidity providers on the NYSE make faster quote adjustments towards equilibrium spreads and depths than they do on NASDAQ. Liquidity providers in both markets make faster spread and depth adjustments for stocks with more frequent trading, greater return volatility, higher prices, smaller market capitalizations, and smaller trade sizes. We find that stocks with greater information-based trading and in more competitive trading environments exhibit faster quote adjustments. The speed of quote adjustment is faster after decimalization in both markets. These results are robust and not driven by differences in stock attributes between the two markets or time periods. Overall, our results indicate that stock attributes, market structure, and tick size exert a significant impact on the speed of quote adjustment.

Stock splits, liquidity, and information asymmetry—An empirical study on Tokyo Stock Exchange

This paper comprehensively studies the effects of stock splits on the market characteristics of the stocks and also tries to give an explanation for the results referring to the existing hypotheses and previous empirical results. We investigate the trading activity, liquidity, information asymmetry, and the investors' behavior changes around the stock splits. We find that the stock splits tend to increase the trading activity, to enhance the market liquidity, to reduce the information asymmetry, and to lower the probability of informed trading. Several main existing explanations—signaling hypothesis, trading range hypothesis, and tick size hypothesis—are largely supported by our empirical findings. J. Japanese Int. Economies 22 (3) (2008) 417–438.

The Ex-Dividend Day Stock Price Behavior: The Case of Portugal

This paper examines the ex-dividend day behavior of stock prices in the Lisbon Stock Market over the period 1990–1998, extending on international evidence and discussing the adequacy of competing theories, considering the Portuguese institutional environment. We find that on the ex-day stock prices fall by less than the dividend, which is in line with the findings of several studies based on US and non-US data. The main contributions of this paper are: (1) the rejection of a tax explanation for the stock price drop, because it is inconsistent with the Portuguese tax regime; (2) considering the very small stock price tick and the fact that dividends are always integer multiples of tick size, the discreteness hypothesis of Bali and Hite (Journal of Financial Economics 47(2):127–159, 1998) is also ruled out as a possible explanation for ex-day price movements. We find no evidence of tax related clientele effects. We propose that ex-day price behavior may be an anomaly, reflecting a less than efficient market with low liquidity levels, price stickiness, and insipid arbitrage trading.

Tick Size and Adverse Selection: Spurious Effects Arising from Serial Correlation

Tick Size and Adverse Selection: Spurious Effects Arising from Serial Correlation

The Impact of Changes in Relative Tick Size on Transaction Costs for Different Size Trades

The Impact of Changes in Relative Tick Size on Transaction Costs for Different Size Trades

Using Announcement and Implementation Event Dates to Disentangle Competing Theories of Stock Splits

By splitting the stock split process into two separate events: split announcement and split implementation, we test six competing split theories. Signal communication and sophisticated trader theories, which focus on the reaction of public and large sophisticated traders, are examined around split announcement. Trading range, dealer promotion and broker promotion theories, which focus on the reactions of small traders, market makers and brokers, are studied around split implementation. Trading inconvenience theory is tested around both split announcement and implementation. Changes in transaction activity, transaction costs, information asymmetry and analysts recommendation are studied after split announcement and split implementation based on the stock split records between 1998 and 2005. We find that total transactions increase after both split announcement and implementation. Information asymmetry decreases significantly after split implementation, while it decreases only slightly after split announcement. The dollar effective spreads decrease and the percentage effective and realized spreads increase significantly after split implementation. Dealers' raw revenues increase after both split announcement and implementation. The number of analysts covering a stock increases after split implementation. A stock's price level moves towards its industry median after split implementation. Hence the trading range, broker and dealer promotion theories are all supported. Signal communication theory is supported by the short-period micro-structural analysis but the trading inconvenience and sophisticated trader theories are not supported. In addition, we also find that the effects of dealer promotion are mitigated when the dollar tick size reduces from $1/16 to $0.01. The effects of broker promotion are positively related with the split factor. Finally, transaction and competition conditions from non-primary markets are examined after split implementation. We find that competition from non-primary markets does increase, while information asymmetry levels decrease by a larger amount in non-primary markets. These results indicate that non-primary market decreases compete with their primary market counterparts through cream-skimming practices.

The Dynamics of Quote Adjustments

Liquidity providers on the NYSE make faster quote adjustments towards equilibrium spreads and depths than they do on NASDAQ. Liquidity providers in both markets make faster spread and depth adjustments for stocks with more frequent trading, greater return volatility, higher prices, smaller market capitalizations, and smaller trade sizes. We find that stocks with greater information-based trading and in more competitive trading environments exhibit faster quote adjustments. The speed of quote adjustment is faster after decimalization in both markets. These results are robust and not driven by differences in stock attributes between the two markets or time periods. Overall, our results indicate that stock attributes, market structure, and tick size exert a significant impact on the speed of quote adjustment.

Clustering in US Stock Prices after Decimalisation

Abstract Early in 2001, US equity markets transitioned from trading in discrete price fractions to a smoother decimal format with a tick size of one penny. Theory suggests in an unconstrained world, stock prices should be distributed uniformly, particularly if the cost of defeating time priority is low. This regime change provides a natural experiment to test whether investors prefer to trade at particular price points even when their choices are essentially unconstrained by regulation. Instead of uniformity, we find widespread evidence of price clustering at increments of five and ten cents (nickels and dimes); the overall magnitude of clustering is double in scale of what is otherwise expected. Previous studies which documented clustering around even‐eighths argued that these patterns were a rational market response to trading impediments. We report consistent findings, but also find that the overall level of post‐decimalisation clustering is far more extensive than is reasonably explained by prior hypotheses. The evidence instead suggests a more fundamental human bias for prominent numbers as discussed in the psychology literature. Contrary to previous studies, we find no difference in price clustering, ceteris paribus, between the Nasdaq and NYSE after decimalisation. Should regulators choose to revisit the notion of tick size, our evidence suggests that for many stocks there would be only minor impact between the transaction prices that prevail now and those that would occur if the tick size were increased to five cents.

Liquidity and market efficiency

Short-horizon return predictability from order flows is an inverse indicator of market efficiency. We find that such predictability is diminished when bid-ask spreads are narrower, and has declined over time with the minimum tick size. Variance ratio tests suggest that prices were closer to random walk benchmarks in the more liquid decimal regime than in other ones. These findings indicate that liquidity stimulates arbitrage activity, which, in turn, enhances market efficiency. Further, as the tick size decreased, open-close/close-open return variance ratios increased, while return autocorrelations decreased. This suggests an increased incorporation of private information into prices during more liquid regimes.

Selective Cysteine Protease Inhibition Contributes to Blood-feeding Success of the Tick Ixodes scapularis

Ixodes scapularis is the main vector of Lyme disease in the eastern and central United States. Tick salivary secretion has been shown as important for both blood-meal completion and pathogen transmission. Here we report a duplication event of cystatin genes in its genome that results in a transcription-regulated boost of saliva inhibitory activity against a conserved and relatively limited number of vertebrate papain-like cysteine proteases during blood feeding. We further show that the polypeptide products of the two genes differ in their binding affinity for some enzyme targets, and they display different antigenicity. Moreover, our reverse genetic approach employing RNA interference uncovered a crucial mediation in tick-feeding success. Given the role of the targeted enzymes in vertebrate immunity, we also show that host immunomodulation is implicated in the deleterious phenotype of silenced ticks making I. scapularis cystatins attractive targets for development of anti-tick vaccines.

An empirical behavioral model of liquidity and volatility

We develop a behavioral model for liquidity and volatility based on empirical regularities in trading order flow in the London Stock Exchange. This can be viewed as a very simple agent-based model in which all components of the model are validated against real data. Our empirical studies of order flow uncover several interesting regularities in the way trading orders are placed and cancelled. The resulting simple model of order flow is used to simulate price formation under a continuous double auction, and the statistical properties of the resulting simulated sequence of prices are compared to those of real data. The model is constructed using one stock (AZN) and tested on 24 other stocks. For low volatility, small tick size stocks (called Group I) the predictions are very good, but for stocks outside Group I they are not good. For Group I, the model predicts the correct magnitude and functional form of the distribution of the volatility and the bid-ask spread, without adjusting any parameters based on prices. This suggests that at least for Group I stocks, the volatility and heavy tails of prices are related to market microstructure effects, and supports the hypothesis that, at least on short time scales, the large fluctuations of absolute returns | r | are well described by a power law of the form P ( | r | > R ) ∼ R - α r , with a value of α r that varies from stock to stock.

TICK SIZE DAN KUALITAS PASAR DI BURSA EFEK JAKARTA

The purpose of this study is to analyze the impact of a tick size change announcement to capital market quality using data from firms listed in Bursa Effect Jakarta. Database classified firms by stock volume level and price level. Generally, there is no evidence to prove that a tick size change announcement have an influence to capital market quality, but for special case we can prove that a tick size change announcement tend to influence capital market quality: i.e for firm that have lower price stock, the reducing tick size announcement will decrease capital market quality and from regression result find that reducing tick size will also decrease capital market quality.Keywords: Announcements, tick size, capital market quality

Market Microstructure of the Pink Sheets

We study the microstructure of the Pink Sheets and assess the ability of existing theory to capture salient features of this relatively unstructured and unregulated market. Clustering patterns in quotes, quoted spreads, and trade prices indicate that market participants have endogenously selected price-dependent tick sizes for different stocks. Clustering intensity varies across stocks as a function of proxies for information availability. Similarly, the bid-ask spread varies as a function of volatility and liquidity. We design a tick size schedule for the Pink Sheets that conforms to the clustering present in quotes, and track measures of market quality after the market adopted the schedule in 2006. No evidence of deterioration is found, suggesting that the market's endogenously selected tick sizes are robust.

NOISE ATAU KEDATANGAN INFORMASI: SEBUAH FENOMENA SPESIFIK PERILAKU HARGA SAHAM DI PASAR MODAL INDONESIA Studi Empiris Berbasis Data Intraday, Bursa Efek Jakarta 1999-2006

This research proved occurrence of noise. This research used intraday data in JSX (Jakarta Stock Exchange). Samples of the data are the firms listed in LQ 45 indexes for the year of 1999-2006. The noise, in accordance with previous concepts and theories, were influenced by the arrival of public and private information and those arrivals were disseminated. Test results concluded that noise over trading and nontrading period, along with overnight and lunch break nontrading session, and the first and second trading session, had occured. Factually, noise occurred in the interval of one and three aforementioned periods. Conversely, information arrival (consistently positive return) occurred in the lag of four preceding period or one day lag only. Sequentially, this research conducted to control using size, trading volume, bid-ask spreads, up-down market, and tick size statute. Having controlled, this research found that these were not always correct and valid. It means that conclusions of the prior researches were not consistent. Especially, this research suggested contra evidence in comparisons with previous concepts and theories whenever controlled by size, trading volume, bid-ask spreads, up-down market and tick size. Keywords: intraday data, trading and nontrading periods, noise, negative autocorrelation, size, trading volume, bid-ask spreads, up-down market, tick size.

Zoonotic Pathogens inIxodes scapularis, Michigan

Zoonotic Pathogens in<i>Ixodes scapularis</i>, Michigan

DOES VOLATILITY DECREASE AFTER REVERSE STOCK SPLITS?

AbstractPrevious research documents that volatility decreases after reverse stock splits. I show that measurement effects bias observed volatility, especially for lower priced stocks. Based on observed returns, volatility decreases 25% after reverse splits. Controlling for bid–ask bounce, volatility still decreases for stocks with prices above $5.00. However, for stocks below $2.00, volatility increases slightly. The portion of observed volatility attributable to measurement effects declines as the stock price increases and as the minimum tick size decreases. Finally, there is a significant and positive cross‐sectional relation between changes in the number of trades and changes in volatility after reverse splits.

The Impact of Tick Size Reduction on Liquidity and Order Strategy: Evidence from the Jakarta Stock Exchange (JSX)

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.

Price Clustering on the Tokyo Stock Exchange

AbstractThis paper examines price clustering on the Tokyo Stock Exchange (TSE). Regardless of tick and lot size, prices ending in zero and five are the most popular. The TSE has no market makers or direct negotiation between traders; therefore, clustering is not explained by collusion or negotiation. Our evidence supports the attraction hypothesis. Clustering also extends to order book depth. There is evidence of strategic trading behavior as traders place orders one price tick better than zero and five to avoid queuing orders at prices ending in these digits. Strategic trading behavior declined and clustering increased when the market became anonymous.