The Effect of Tick Size Change on Liquidity: Evidence from Borsa Istanbul

Abstract

The effect of the tick size has been extensively examined in the equity markets around the world. In theory, the impact of the tick size is twofold. If the tick size is large the bid-ask spread is wider so that the cost of trading for an investor is higher. If the tick size is small then it will lead to reducing the supply of liquidity by market makers. Empirical studies have examined the change in tick size and found that the lower tick size leads an increase in the market liquidity since the tick size determines the bid and ask spread which is used to capture the liquidity of the stocks.

Tick size has been gradually changed in Borsa Istanbul. On March 2014, the tick size was designed to put stocks into three different categories based on their closing price. On September 2015, the regulators decided to change the tick size price range and put stocks into four different categorize.

In this study, I examine the effect of the last change of tick size on liquidity using well-known liquidity measures such as Amihud, Corwin and Schultz and Turnover proxies. The sample period is between September 2015 and December 2017. To understand the real effect of decreasing the minimum price variation, I only focus on the companies that the minimum price variation was reduced. (e.g. the price range is from 10,05 to 49,99 Turkish Liras). Univariate analysis is employed to capture the impact of the decline in tick size.