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

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

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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 languageEnglish
Pages (from-to)905-945
Number of pages41
JournalFinancial Management
Issue number4
Early online date21 Sept 2015
Publication statusPublished - 22 Oct 2015


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