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Tick Size and Informed Trading: Evidence from the Taiwanese Stock Market

Author

Listed:
  • Chang-Wen Duan
  • Ken Hung
  • Shinhua Liu

Abstract

We adopt the Sandås model for order-book equilibrium to examine informed trading on the Taiwanese stock market, a purely order-driven call-auction market. We find that adverse-selection cost is low for well-known stocks with high liquidity and low volatility, but cost is high for monitoring the order books of those stocks. Our empirical results show that the impact of adverse selection is greatest at the beginning of each trading day and that informed traders engage in stealth trading, supporting the stealth trading hypothesis. Finally, with the special tick size rules on the market, both adverse-selection cost and monitoring cost decline as tick size decreases.

Suggested Citation

  • Chang-Wen Duan & Ken Hung & Shinhua Liu, 2022. "Tick Size and Informed Trading: Evidence from the Taiwanese Stock Market," International Business Research, Canadian Center of Science and Education, vol. 15(1), pages 1-1, January.
    • Handle: RePEc:ibn:ibrjnl:v:15:y:2022:i:1:p:1
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    References listed on IDEAS

    as
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    5. Xin Zhao & Kee H. Chung, 2006. "Decimal Pricing and Information-Based Trading: Tick Size and Informational Efficiency of Asset Price," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 753-766.
    6. Ke, Mei-Chu & Jiang, Ching-Hai & Huang, Yen-Sheng, 2004. "The impact of tick size on intraday stock price behavior: evidence from the Taiwan Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 12(1), pages 19-39, January.
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    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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