Does Tick Size Change Improve Liquidity Provision? Evidence from the Indonesia Stock Exchange By

The market regulators of the Indonesia stock exchange have made several changes in permissible minimum price variations, from a single tick size (IDR 5) in 2000 to multiple tick sizes (IDR1, 5, 10, 25, 50) in 2007 for the purposes of promoting efficient trading and liquidity improvements. Researchers have demonstrated that finer tick sizes will lower bid-ask spreads, yet studies which examine the impact of tick size on other key liquidity dimensions such as realized market depth and speed of quote revision are limited. As tick size diminishes so too do the benefits of time precedence rules and encouragement is given to the existence of front-runners, traders are more reluctant to show their orders and more aggressive to consume market orders which leads to a thinner order book. This paper will adopt the V-Net measurement (Engle & Lange, 2001) to assess whether there is a significant difference in net directional volume pre and post tick size changes and to further assess the relationship amongst realized market depths, price durations and spreads. This study employs four major stocks to analyse the impact of tick size on liquidity provision using intraday trading data for six weeks (2 October – 10 November 2009). Tw