(The) effects of minimum tick size on liquidity in the kospi 200 option market

Abstract

This thesis provides an empirical analysis of the effects of tick size on liquidity in the KOSPI 200 option market. In this thesis, the effects of minimum tick size on market liquidity are examined using the measures of bid-ask spreads, market depth and quote adjustment speed in KOSPI200 option market. The results of this thesis suggest that the average absolute bid-ask spreads are narrower in the 0.01 tick market for options priced below 3. On the other hand, the average relative bid-ask spreads are greater in that market, which can be interpreted that the lower quoted bid-ask spread mid points imply a larger tick size on a percentage basis. We also find that smaller tick size reduces the cost for small market order but the benefit to small orders is sharply reduced in the smaller tick market. However, in the 0.05 tick market for options priced above 3, intraday price changes are subsequently reversed, indicating a lack of liquidity. The speed of quote adjustment speed is faster for options with 0.01 tick size indicating that liquidity suppliers make faster quote adjustments in response to new information in the small tick size market.