PROGRAMA 5 INDUSTRIA DE LA MADERA

Table 3-1 provides descriptive statistics of the market quality indicators surrounding the structural transitions for both event (3Y T-bond and 5Y Bobl) and control (10Y T- bond and 10Y bund) contracts. Prior literature including Ahn et al., (1996, 1998), Goldstein and Kavajecz (2000) and Aitken and Comerton-Forde (2005) indicate reductions in the minimum tick lead to lower bid -ask spreads. In line with these findings, there is a significant increase of 0.0050 (0.0046) basis points in the bid-ask spread for the 3Y T-bond (5Y Bob1) contracts. For the control for 3Y T-bond (i.e., 10Y T-bond), bid-ask spreads decline significantly at the 1% level, while those for the control for 5Y Bob1 (i.e., 10Y Bund) increase significantly at the 1% level. Supporting the prediction of hypothesis H3,1, results suggest that the increase in the bid-ask spread for the 3Y T-bond is due to the tick-size increase since the market for the 10Y T-bond contracts experiences the opposite change. This is in line with a number of These are in line with a number of studies showing that tick size reductions are associated with lower bid-ask spreads. With respect to the 5Y Bob1 contract, the increase in the bid- ask spread could result from a market-wide change as bid-ask spreads for the 5Y Bob1 and 10Y Bund change in the same direction, in contradiction to hypothesis H3,1.

84

Bid-ask spreads per minimum tick for the 3Y T-bond (5Y Bob1) contracts decrease by 0.028 (0.128) ticks, which is significant at the 1% level. For the 10Y T-bond, bid-ask spreads per minimum tick decline significantly at the 1% level, while those for the 10Y Bund increase significantly at the 1% level. As opposed to the bid-ask spread results, only the change in the 5Y Bob1 bid-ask spread per minimum tick can be attributed to the tick size increase since the change for the 10Y Bund occurs in the opposite direction. In regards to the bid-ask spread per minimum tick for the 3Y T- bond, it is not possible to conclude whether the tick size increase is the cause of the decrease as the control contract (i.e., 10Y T-bond) experiences a qualitatively similar change.

85

Table 3-1 Descriptive Statistics

This table present descriptive statistics for measures of market liquidity surrounding the increase in minimum tick for the 3Y T-bond and the 5Y Bob1 contracts. The tick size of the 3Y T-bond contracts was increased from half to a full-basis point on May 11, 2009. The pre-event sample period extends from 13 May, 2008 to 13 August, 2008. The post-event sample period extends from 13 May, 2009 to 13 August, 2009. The tick size of the 5Y Bob1 contracts was increased from half to a full-basis point on June 15, 2009. The pre-event sample period extends from 17 June, 2008 to 17 September, 2008. The post- event sample period extends from 17 June, 2009 to 17 September, 2009. Bid-ask spreads and depth are sampled every 5 minutes (15 minutes) and then averaged for each day. Bid-Ask Spread is the best ask price minus the best bid price in contract points. BAS is calculated as the bid-ask spread divided by the minimum tick. Best Depth is the aggregate order volume at the best bid and best ask price. Total depth is the aggregate order volume throughout the limit-order book. Volatility is the natural logarithm of the highest traded price divided by the lowest traded price for each day. Volume is the average daily traded volume. * indicates statistical significance at the 5% level. ** indicates statistical significance at the 1% level. Panel A: SFE 3Y T-bond (Event Contract) 10Y T-bond (Control Contract)

Pre Post Post - Pre Pre Post Post - Pre

Bid-Ask Spread 0.0052 0.0102 0.0050** _0.0053 0.0052 -0.0001** BAS 1.043 1.015 -0.028** 1.059 1.034 -0.025** Best Depth 531 1,179 648** 192 148 -44** Total Depth 3,471 4,686 1,215** 1,227 865 -362** Volatility 0.0860 0.1008 0.0148* _0.0860 0.0921 0.0061* Volume 48,939 51,461 2,522 _19,662 15,356 -4,306** Panel B: Eurex 5Y Bob1 (Event Contract) 10Y Bund (Control Contract)

Pre Post Post - Pre Pre Post Post - Pre

Bid-Ask Spread 0.0059 0.0105 0.0046** _0.0105 0.0107 0.0002** BAS 1.176 1.051 -0.125** 1.052 1.069 0.017** Best Depth 259 651 392** 375 335 -40** Total Depth 3,719 9,889 6,170** 7,128 6,029 -1,099** Volatility 0.4819 0.3653 _{-0.1166** 0.6721 0.5691 -0.1030**} Volume _{491,517 315,963 -175,554** 794,117 588,931 -205,186**}

Harris (1994) predicted a reduction in the tick size would decrease quoted depth as liquidity provision is less profitable and more risky. In line with this prediction, quoted depths at both the best quotes and throughout the limit order book increase for the 3Y T-bond (an increase of 648 (1,215) contracts for best (total) depth) and 5Y Bob1 contracts (an increase of 392 (6,170) contracts for best (total) depth), in contrast to

86

the control contracts where both best and total depth levels decline: a reduction of 44 (362) contracts for best (total) depth in the 10Y T-bond and that of 40 (1,099) contracts for best (total) depth in the 10Y Bund. All changes in (both best and total) quoted depths reported in Table 3-1 are statistically significant at the 1% level. This is line with the predictions of the second hypothesis. In contrast to the results for bid- ask spreads and bid-spreads per minimum tick, results clearly indicates that the increases in (both best and total) quoted depths for the two event contracts are due to the tick size increase rather than a market-wide event, as the changes for the corresponding control contracts are in the opposite direction.

Table 3-1 also reports changes in trading volume and volatility surrounding the tick size increase. Trading volume is significantly higher for the 3Y T-bond, but is significantly lower for the 10Y T-bond, while volatility is significantly higher across both contracts. However, these are in line with the changes in the control contract, suggesting that the change in tick size has not had an impact on traded volume. For example, Ahn et al. (2007) finds no increase in volume on the Tokyo Stock Exchange following the 1997 tick reduction. There is a significant decline in traded volume and volatility for the 5Y Bob1 and 10Y Bund contracts.