University: University of Wollongong
Supervisor: Andrew Lepone

Research Questions: 

• What are the changes in liquidity on Nasdaq throughout the trading day?
• What is the impact of an increase in the tick size on liquidity under a futures market setting?

Research Motivation:

Prior literature on other market structures (specialist and order-driven markets) documenting an inverse relationship between bid-ask spreads and quoted depth. Furthermore, prior literature finds intraday patterns in bid-ask spreads differ sharply between competitive dealer markets and specialist and order-driven market structures. This is attributed to dealers seeking to manage inventory levels which are not a factor regarding other market types. The paper looks to examine if this relationship holds for quoted depth on a dealer market (the Nasdaq), showing whether institutional differences between markets has an impact on intraday variations in liquidity.

Reductions in the tick size do not always generate improvements in market quality if it leads to a pricing grid that is too fine. If the current tick size is too fine, an increase in the minimum tick will increase the propensity of investors to post at the competitive spread. Second, even considering that a higher minimum tick increases the cost of immediacy, this may be offset by significant growth in limit orders leading to an overall improvement in market quality. Thus from the perspective of the exchange, it is important to know whether increasing the tick size can lead to improvements in overall liquidity.

High-level Research Design:

The first paper examines intraday variations in quoted depth on Nasdaq, a competitive dealer market. This is done by examining standardized variations in bid-ask spreads, quoted depth, volume and volatility on Nasdaq relative to other market structures. Volume and volatility are examined as they are known determinants of bid-ask spreads and quoted depth. Numerous robustness tests are employed to ensure the validity of the results, using the Generalized Method of Moments regression technique.

This second paper examines the impact of an increase in the minimum tick on market quality under a futures market setting. This paper contributes to the literature by investigating the impact of the increase in minimum tick of the 3-Year Treasury bond futures on the Sydney Futures Exchange (SFE) and the 5-Year Euro Bobl futures on the Eurex on market quality.