Influence of Standardisation of Trading Board Lot on Stock Liquidity and Volatility

Ng, Yi-Xiang (2024) Influence of Standardisation of Trading Board Lot on Stock Liquidity and Volatility. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

Trading board lot, also referred to as the minimum trading unit (MTU), is the smallest number of shares investors must submit in their trading orders. The implementation of the standardisation of trading board lot (STBL) to 100 units for all listed securities on Bursa Malaysia (formerly KLSE) on May 26, 2003, marked a significant milestone in the history of the Malaysian stock market. Despite its importance, there has been a scarcity of research on its impact. This study aims to fill this gap by comprehensively examining the effects of STBL on stock liquidity and volatility in both the short-term and long-term. The study employs regression models with various proxies to measure stock liquidity and volatility. Stock liquidity is measured using bid-ask spread and the Amihud illiquidity ratio, while volatility is measured through three proxies: the standard deviation of daily returns, the ratio of daily stock return standard deviation to daily market returns standard deviation, and the natural logarithm of squared daily returns. The focal independent variable is the STBL event, measured by a dummy variable. Data for the study is sourced from Refinitiv Eikon for stock-related information and the Bursa Malaysia Knowledge Centre for stock listing details. The study period covers both short-term and long-term effects of STBL implementation, allowing for a comprehensive analysis of its impact. The empirical results indicate a significant effect of STBL on both stock liquidity and volatility. In terms of liquidity, STBL shows a negative association with bid-ask spreads and the Amihud illiquidity ratio across various short- and long-term periods. This suggests that STBL reduces trading frictions, enhances market stability, and attracts a wider range of investors, leading to increased liquidity levels and improved market efficiency. Regarding volatility, the study finds predominantly positive impacts of STBL on stock volatility across various models and periods. While there may be initial fluctuations in market sentiment, the long-term effect is marked by heightened trading activity and amplified stock price fluctuations, contributing to higher levels of volatility. This dynamic relationship between STBL and stock volatility evolves, transitioning from negative to positive impacts in extended analysis periods. Overall, the empirical findings support the hypothesis proposing a positive relationship between the STBL and stock liquidity, while also partially supporting the positive relationship between the STBL and stock volatility. These findings have implications for both academic and practical perspectives. The study enriches existing literature by examining short- and long-term effects of STBL on stock liquidity, addressing the lack of research within the Malaysian context. From a practical standpoint, policymakers can use the evidence to formulate regulations that balance accessibility and risk, while listed firms and retail investors can adjust their strategies based on STBL effects to enhance resilience and maximise returns. Listed firms can adjust their strategies based on STBL effects to enhance resilience, and retail investors can refine their trading strategies and decision-making by comprehending the implications of STBL on stock liquidity and volatility.