Whilst most European stock exchanges now have a minimum lot size – known as the Minimum Trading Unit (MTU) - of one share, a number of important stock exchanges, including the NYSE, the NASDAQ and the Tokyo Stock Exchange, still set higher MTUs. These are decided at the discretion of the exchanges or, in some instances, by the issuing companies.
Lessons learned from Italy
Researchers from the University of Bath's School of Management, along with the Warwick Business School and Bocconi University, studied the impact on market quality of reducing the MTU to one share at the Italian Stock Exchange, the Borsa Italiana, in 2002.
Lower transactions costs
Their findings, published in Financial Management, show that the change in the MTU resulted in lower transaction costs, and an increase in the number of individual investors trading on the exchange, notably a 16 per cent increase in online trading in the month after the reduction. Dr Pietro Perotti, lecturer in Accounting & Finance, said: “Constraints on the MTU may facilitate exchange operations. However, removing these constraints encourages the participation of individual investors, retail traders, who would not be able to trade at a size larger than the MTU.
More retail trading
“Our results inform market regulators and participants on how the MTU design may affect market quality. The topic is particularly relevant because the average transaction size significantly decreased in recent years. Stock exchanges with MTU constraints may consider our results as strong evidence supporting a decision to remove or weaken the constraints.”
Dr Arie Gozluklu, Assistant Professor at the Warwick Business School, added: “The evidence from the Italian market shows that stock exchanges are better off removing a trading constraint imposed on retail traders with a limited budget. Thus, exchanges will allow a wider participation to the stock market in a fair trading environment.”
The School of Management was ranked 8th in the UK in the independently-assessed Research Excellence Framework. 89 per cent of their submitted case studies were deemed to have an outstanding or very considerable impact.