Lot size constraints and market quality: evidence from the Borsa Italiana

Arie E. Gozluklu; Pietro Perotti; Barbara Rindi; Roberta Fredella

doi:10.1111/fima.12105

Lot size constraints and market quality: evidence from the Borsa Italiana

Arie E. Gozluklu, Pietro Perotti, Barbara Rindi, Roberta Fredella

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Abstract

Trading venues often impose a minimum lot size (minimum trade unit [MTU]) to facilitate order execution. We document changes in market quality associated with the reduction of the MTU to one share on the Italian stock exchange, the Borsa Italiana. We observe a substantial improvement in liquidity, with an average decrease in the relative spread of 10.2%, and more significant improvements for those firms for which the MTU constraint was more binding. We also show that the improvement in liquidity is mainly driven by a reduction in adverse selection; that informational efficiency is not significantly affected; and there is an increase in retail trading. We interpret our findings in light of a model of asymmetric information in which the MTU affects traders’ choice of order size.

Original language	English
Pages (from-to)	905-945
Number of pages	41
Journal	Financial Management
Volume	44
Issue number	4
Early online date	21 Sept 2015
DOIs	https://doi.org/10.1111/fima.12105
Publication status	Published - 22 Oct 2015

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10.1111/fima.12105

Accepted Version
This is the peer reviewed version of the following article: Gozluklu, A. E., Perotti, P. , Rindi, B. and Fredella, R. (2015), Lot Size Constraints and Market Quality: Evidence from the Borsa Italiana. Financial Management, 44: 905-945, which has been published in final form at https://doi.org/10.1111/fima.12105. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Accepted author manuscript, 1.08 MB

Pietro Perotti
- P.Perottibath.acuk
- Management - Senior Lecturer (Associate Professor)
- Accounting, Finance & Law
- Centre for Governance, Regulation and Industrial Strategy - Senior Lecturer
- Centre for Business, Organisations and Society (CBOS)
Person: Research & Teaching

Cite this

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Lot size constraints and market quality: evidence from the Borsa Italiana

Abstract

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