AN EMPIRICAL ANALYSIS OF THE EFFECTS OF THE SGX LOT SIZE REDUCTION ON LIQUDITY AND MARKET EFFICIENCY

Abstract

In this study, I examine the effects of the minimum lot size reduction on market efficiency on the Singapore Stock Exchange (SGX). On 19th January 2015, the SGX reduced the minimum lot size from 1,000 to 100, with a propounded aim of attracting more individual investors to the market (SGX, 2015). Since individual investors are often thought to be “noise traders” (Black, 1986), it could be that an influx of such traders to the market deteriorates market efficiency. Studying changes in market composition and market efficiency (i) immediately around the 19th January rule-change and (ii) around earnings announcement windows since, I find evidence of a decline in market efficiency since the lot size reduction. I also find evidence that the decline in market efficiency is greater for firms with higher-priced shares.