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Removing the Trade Size Constraint? Evidence from the Italian Market Design

  • Arie E. Gozluklu
  • Pietro Perotti
  • Barbara Rindi
  • Roberta Fredella

Trading venues often impose a minimum trade unit constraint (MTUC) to facilitate order execution. This paper examines the effects of a natural experiment at Borsa Italiana where the exchange reduced the MTUC to one share for all stocks. After the removal of the MTUC, we observe a substantial improvement in liquidity, measured by a decrease in the bid-ask spread and an increase in market depth. The cross-sectional evidence shows that those firms for which the MTUC was more binding benefit the most from the microstructure change. These findings are consistent with a model of asymmetric information in which the MTUC affects traders’ choice of order size. As the model predicts, liquidity improves following the reduction in adverse selection costs. KEYWORDS: minimum trade unit constraint, limit order book, market liquidity, adverse selection costs

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 493.

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Date of creation: 2013
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Handle: RePEc:igi:igierp:493
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