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Minimum tick size reduction and stock liquidity: lessons from the Warsaw Stock Exchange

Author

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  • Szymon Stereńczak

    (Poznan University of Economics and Business)

Abstract

On 4 March 2019 the minimum tick size reduction was implemented on the Warsaw Stock Exchange (WSE herein), allowing stock prices to be quoted with an accuracy of up to 0.0001 PLN. Studies carried out based on American stock markets indicate that the minimum tick size reduction results in a change in stock liquidity. We aim to analyse whether the reduction of the minimum tick size on the WSE in March 2019 has resulted in a change of stock liquidity. Our analyses spanned various time perspectives and various subsamples as well. Based on the results of the paired difference test, we conclude that the implemented changes have caused an increase of tightness (cost dimension of liquidity) and a decrease of depth (volume dimension of liquidity). Resiliency (price impact dimension of liquidity) remained unaffected by the changes implemented. Thus, the minimum tick size reduction on the Polish stock market had the same effect on liquidity as on American ones. Our results allow the use of the minimum tick size reduction as a quasi-natural experiment for future studies, e.g. for the difference-in-differences method.

Suggested Citation

  • Szymon Stereńczak, 2021. "Minimum tick size reduction and stock liquidity: lessons from the Warsaw Stock Exchange," Bank i Kredyt, Narodowy Bank Polski, vol. 52(6), pages 545-576.
    • Handle: RePEc:nbp:nbpbik:v:52:y:2021:i:6:p:545-576
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    More about this item

    Keywords

    stock liquidity; minimum tick size; bid-ask spread; tick size; Warsaw Stock Exchange;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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