Stock Price Clustering on the Istanbul Stock Exchange

Increased competition during the last two decades forces organizers of financial exchanges to reconsider the optimality of their design. One feature of an exchange is the tick rule it employs. During the last decade, reduction in tick size has been a common practice. This study examines an emerging market that represents a polar case because of its apparently large tick size relative to stock price. On the Istanbul Stock Exchange (ISE), relative tick size is at least 120% and as much 2,200% greater than that used by other exchanges. No previous study has examined the issues related to the ISE’s tick size choice, and empirical evidence from this market may be of interest to policy makers there as well as to policy makers in other markets who question the optimality of their tick size. As a first attempt, this paper provides evidence on the extent of price clustering in this market by using tick-by-tick data of about nine million transactions. In contrast to a widely-accepted view that mandatory minimum price change rules should not restrict trader behavior, this study finds an extremely low level of clustering that has been not observed in other markets. This evidence suggests that the choice of the tick size reflects other concerns of ISE policy makers. The ISE is a relatively thin market for which the existence of sufficient market making profits must be vital for maintaining the liquidity in the market. Moreover, the absence of domestic and international competition (only a single Turkish stock is listed on foreign markets) may allow the employment of such a large tick size. * Bilkent University, Faculty of Business Administration, 06533 Ankara. Phone: (312) 266-2353 Fax: (312) 266-4958 E-mail: [email protected] 1