Impact of Tick-Size Reduction on Intraday Patterns of Market Liquidity

Abstract

Unlike prior related studies focusing on the effect of a tick-size reduction on the intraday patterns of market liquidity for both NYSE and NASDAQ markets, we provide extensive evidence for the Taiwan Stock Exchange. Consistent with previous research, we find that the intraday behavior in terms of spread, trading activity, volatility, and information asymmetry exhibits a U-shaped pattern, while both the depth and binding constraint exhibit an inverted U shape. This implies that limit-order traders protect themselves from losses to informed traders by actively managing both price and quantity. Next, except for the binding constraint, where the largest (smallest) declines occur during the first thirty-minute interval (midday), the magnitudes of the declines in information asymmetry, spread, depth, trading volume, and volatility are the largest (smallest) during midday (during the first thirty-minute interval).