The effects of a tick-size reduction on the liquidity in a pure limit order market: evidence from Hong Kong

This study empirically investigates the effects of a tick-size reduction on the liquidity of the Hong Kong stock market, a pure limit order market. By using a modified cumulative depth to measure liquidity, we find that overall liquidity for liquid stocks is significantly decreased after the tick-size reduction, which implies that the tick-size reduction probably increases the transaction costs of large institutions. Furthermore, the results show that trading sizes in high-volume stocks are decreased, probably because large institutional traders use smaller size transactions to hedge the adverse effect caused by the decreased liquidity.