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The impact of a change in the tick size rule on market quality: evidence from the Australian Stock Exchange

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  • Mehdi Sadeghi
  • Kai Zhang

Abstract

On 1 April 2005, the Australian Stock Exchange reduced the minimum tick size for stocks priced between $0.5 and $2. We examined the market quality of the stocks affected by the minimum tick size rule, using a comprehensive intra-day data sample and an event study methodology. We found that quoted spreads declined by 18% and displayed market depths declined by 57% after the event. Overall market depth in the limit-order book also declined significantly. Although the limit-order submission strategy appears to be more aggressive in absolute terms, we found no convincing evidence of an increase in trading activity relative to the control groups. Further evidence indicates that the change in the minimum tick size rule had no impact on the order exposure of stocks in our sample.

Suggested Citation

  • Mehdi Sadeghi & Kai Zhang, 2011. "The impact of a change in the tick size rule on market quality: evidence from the Australian Stock Exchange," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 3(2/3), pages 155-175.
    • Handle: RePEc:ids:injbaf:v:3:y:2011:i:2/3:p:155-175
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