Price discovery, order submission, and tick size during preopen period

Xijuan Xiao, Ryuichi Yamamoto

Research output: Contribution to journalArticlepeer-review

Abstract

Using limit order book data, this study investigates the effects of minimum tick size reduction on price discovery and order submission strategies during the preopen call auction period in the Tokyo Stock Exchange. Studying the largest stocks' changes before and after the tick size reduction, our findings suggest that price discovery becomes more efficient when a smaller tick size is employed. A reduction in tick size induces a decrease in market depth and spread and enhances the speed of price discovery by encouraging more aggressive order to be placed and providing investors a better learning and communicating environment to incorporate information into order decisions. Our results demonstrate that, although orders are not matched and no transaction occurs during the preopen period, the order placement at these moments is neither necessarily noisy nor completely manipulative; factors that impact the investor's order choice during the normal trading period also work in this period.

Original languageEnglish
Article number101428
JournalPacific Basin Finance Journal
Volume63
DOIs
Publication statusPublished - 2020 Oct

Keywords

  • Market microstructure
  • Order submission
  • Preopen period
  • Price discovery
  • Tick size reduction

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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