New research released by the Capital Markets Cooperative Research Centre (CMCRC) suggests that reducing tick size for stocks in the TOPIX 100 on the Tokyo Stock Exchange has significantly improved quality of the Tokyo Stock Exchange, decreasing transaction costs and improving price discovery.
Effective spreads, a measure of the cost of demanding liquidity dropped from approximately 14 basis points to 9 basis points following the introduction of the first part of a two stage implementation process on January 14, 2014. Spreads dropped further from 9 basis points to 4 basis points post July 22, 2014. In all the drop amounted to a 70% change in the cost of trading for TOPIX securities. Given the weight of the TOPIX securities in the overall market, the drop in the effective spreads for the total market was around 25%.
“The analysis we’ve done clearly shows that narrowing tick sizes improved market efficiency for the TSE,” said Professor Aitken. “It remains to be seen what this did to market fairness as well as the market share of the TSX vis-à-vis its smaller rivals (research on that is underway) but it does provide a prediction for the likely impact of the SEC’s proposed increases in tick sizes.
“Our bet is that it that the SEC’s moves to increase tick size for smaller securities will do the market no service unless it comes with affirmative market marker obligations in these stocks,” said Professor Aitken.
We will release updated results post October 31 when two securities enter and leave the TOPIX100 index. The results for those stock that leave the index will be particularly interesting noted Professor Aitken.
Using the Market Quality Dashboard*, we will also report on what has happened with all TOPIX stocks over a longer period, in light of earlier evidence from the Singapore market (see web reference below) that spread reductions reversed in the space of a year suggesting that the market will find its own level.
Watch Professor Aitken talk more about tick sizes for TOPIX here: https://www.youtube.com/watch?v=wvkrUQIBdhA&list=UUnyU9-4WAduJhlYOGTHTf3w
Watch Professor Aitken talk about tick size change in Singapore here: https://www.youtube.com/watch?v=Foxd3fEk2dQ&list=UUnyU9-4WAduJhlYOGTHTf3w)
*The Market Quality Dashboard is a web based application that enables users to visualise an array of metrics representing efficiency and fairness pre and post market design changes across 10 years of data for any market in the world.