A Tale of Two Consequences: Intended and Unintended Outcomes of the Japan TOPIX Tick Size Changes

TL;DR

This paper examines the effects of the Tokyo Stock Exchange's tick size changes on the TOPIX 100 index, focusing on intended benefits like improved prices and faster trades, as well as unintended consequences such as reduced liquidity for large orders.

Contribution

It provides an empirical analysis of how tick size adjustments impact trading metrics and liquidity, highlighting both intended and unintended market microstructure effects.

Findings

Price improvement observed after tick size reduction

Trading volume increased post-change

Execution sizes decreased, affecting large orders

Abstract

We look at the effect of the tick size changes on the TOPIX 100 index names made by the Tokyo Stock Exchange on Jan-14-2014 and Jul-22-2104. The intended consequence of the change is price improvement and shorter time to execution. We look at security level metrics that include the spread, trading volume, number of trades and the size of trades to establish whether this goal is accomplished. An unintended effect might be the reduction in execution sizes, which would then mean that institutions with large orders would have greater difficulty in sourcing liquidity. We look at a sample of real orders to see if the execution costs have gone up across the orders since the implementation of this change. We study the mechanisms that affect how securities are traded on an exchange, before delving into the specifics of the TSE tick size events. Some of the topics we explore are: The Venue Menu and How to Increase Revenue; To Automate or Not to Automate; Microstructure under the Microscope; The Price of Connections to High (and Faraway) Places; Speed Thrills but Kills; Pick a Size for the Perfect Tick; TSE Tick Size Experiments, Then and Now; Sergey Bubka and the Regulators; Bird`s Eye View; Deep Dive; Possibilities for a Deeper Dive; Does Tick Size Matter? Tick Size Does Matter!