Does Indonesia Stock Exchange Need Tick Size Reduction?

Abstract

Indonesia Stock Exchange (IDX) has implemented new policies on January 6, 2014, which are changes in Lot Size and Tick Size. These instruments are expected to bring more liquidity to Indonesia Capital Market and in the end IDX can provide investment opportunities and sources of financing in order to support national economic development. This research explores the impact of an exogenous tick size reduction on bid-ask spreads, depths, and trade time on the Indonesia Stock Exchange. The sample period takes 24 months, which is 12 months before and 12 months after the tick rule change. We find that the impact of the tick reduction on the IDX is similar to that on other markets. Tick reduction on IDX is associated with declines in spread, volume and market depth (quote volume). We are unable to confirm significant effect on Trade Time and Quote to Trade ratio. Our cross-sectional regressions show that after the tick size reduction policy has been implemented, reduction in relative spread is significant. Stock with greater trading activity experienced greater spread reductions. However, we fail to find evidence of a significant impact of value, volume and price variables.