Tick Size and Trading Costs on the Korea Stock Exchange#

The Korea Stock Exchange (KSE) imposes larger mandatory tick sizes on higher priced stocks. In this study, we examine the effects of tick size on spreads, depths, and quote clustering using trade and quote data for a large sample of KSE-listed stocks. Our results indicate that large tick sizes imposed on high-price stocks are significant binding constraints on absolute spreads, resulting in large spreads for these stocks. We do not find any convincing evidence of larger market depths associated with larger tick sizes. On the contrary, we find stocks that move to smaller tick categories actually exhibit an increase in market depths. Our results also show that quote clustering on the KSE is negatively related to the tick size. Overall, our findings indicate that step-increasing tick sizes are detrimental to market quality, although the adverse effect of binding tick sizes is somewhat mitigated by lower negotiation costs