Analysis of the Impact of HKEX's Reduction in Minimum Stock Price Tick Sizes on Market Liquidity and Trading Efficiency

Based on the information and data I have collected, I now present a detailed analysis report for you.

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Hong Kong Exchanges and Clearing Limited (HKEX) formally implemented the first phase of the reform to reduce the minimum tick size for securities trading on August 4, 2025. This is a key component of a series of reform measures aimed at enhancing market efficiency in Hong Kong’s capital markets [1]. According to HKEX’s 2025 Review Report, this initiative aims to “reduce overall transaction costs and enhance the efficiency of the price discovery process” [1]. Following the successful implementation of the first phase and the completion of a mid-term review, HKEX announced that it will proceed with the second phase of the reform as planned in mid-2026 [2].

Hong Kong’s stock market has long faced a structural issue of liquidity divergence. According to market analysis, liquidity in Hong Kong stocks exhibits the characteristic of “head concentration, tail depletion”: leading securities are actively traded, but over 70% of small and mid-cap stocks have extremely low turnover, resulting in severe liquidity divergence [3]. This structural issue is a key background for the launch of the minimum tick size reform.

Price Range	Original Minimum Tick Size	Adjusted Minimum Tick Size	Cost Reduction
HK$0.5-HK$1	HK$0.01	HK$0.005	50%
HK$1-HK$2	HK$0.02	HK$0.005	75%
HK$2-HK$5	HK$0.02	HK$0.01	50%
HK$5-HK$10	HK$0.02	HK$0.01	50%
HK$10-HK$20	HK$0.02	HK$0.01	50%
HK$20-HK$50	HK$0.05	HK$0.02	60%

It is worth noting that both the first phase and the planned second phase focus on

, which covers a large number of “penny stocks” and “micro-cap stocks” in the Hong Kong market. According to HKEX statistics, the proportion of penny stocks (securities priced below HK$1) in the Hong Kong market is significantly higher than in most other major markets [4].

Comparing HKEX’s minimum tick size system with other major exchanges, it can be seen that HKEX’s previous tick size was relatively large:

• NASDAQ
  : Uses decimal pricing, with a minimum tick size of US$0.01
• London Stock Exchange (LSE)
  : Uses pound sterling pricing, with a minimum tick size of £0.01
• Pre-adjustment HKEX
  : For the HK$0.5-HK$10 range, the minimum tick size was HK$0.01, representing a relatively high proportion relative to stock prices

Taking a HK$1 stock as an example, the minimum price change was 1% before the adjustment, which dropped to 0.5% after the adjustment. This adjustment brings HKEX’s price change mechanism closer to international market standards, helping to enhance the international competitiveness of the Hong Kong market [5].

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The most direct impact of the minimum tick size reduction is the

. The bid-ask spread is one of the core indicators of market liquidity, representing the transaction cost for investors.

For a stock priced at HK$1:

• Pre-adjustment
  : Minimum bid-ask spread was HK$0.01, representing a relative spread of approximately 1%
• Post-adjustment
  : Minimum bid-ask spread is HK$0.005, representing a relative spread of approximately 0.5%
• Cost Reduction
  : 50%

For a stock priced at HK$2:

• Pre-adjustment
  : Minimum bid-ask spread was HK$0.02, representing a relative spread of approximately 1%
• Post-adjustment
  : Minimum bid-ask spread is HK$0.005, representing a relative spread of approximately 0.25%
• Cost Reduction
  : 75%

HKEX’s official mid-term review shows that “no adverse effects have been observed for stocks within the adjustment range” [2], with bid-ask spreads narrowing significantly and overall liquidity improving [2].

Price discovery is an important function of capital markets. The improvement in price discovery efficiency brought about by the minimum tick size reduction is reflected in the following aspects:

1. Enhanced price continuity
   : Smaller tick sizes result in smoother price changes, reducing price jumps
2. Timelier information transmission
   : Minor price changes can more accurately reflect changes in supply and demand relationships
3. Improved arbitrage efficiency
   : The cost of cross-market and cross-product arbitrage transactions is reduced, leading to faster spread convergence

According to HKEX’s analysis, reducing the minimum tick size “improves trading opportunities by enhancing the transparency of price discovery and lowering the barrier to participation” [4].

• Increased trading frequency
  : Lower transaction costs encourage more frequent small-scale transactions
• Increased participation of retail investors
  : After the minimum board lot value guideline was reduced from HK$2,000 to HK$1,000, the threshold for retail investor participation was lowered [4]
• Improved market depth
  : More limit orders can be placed at better prices, increasing market depth

• The number of transactions may increase. According to HKEX estimates, if the minimum board lot value is reduced to HK$1,000, daily transactions are expected to increase by approximately 1.9% [4]
• Increased system load: High-frequency trading may increase, placing higher demands on trading systems

According to HKEX’s 2025 Review Report, the overall market performance in 2025 demonstrates the effectiveness of the reform:

Indicator	2025 Performance
Average daily futures and options contracts traded	1.69 million contracts, representing an 8% year-on-year increase
Average daily stock options traded	895,548 contracts, a 23% increase compared to the same period last year
Average daily ETP trading volume	HK$37.6 billion, doubling compared to the same period last year
Number of new ETP listings	48

These data indicate an overall improving trend in Hong Kong market liquidity. While it is difficult to attribute all improvements to a single policy, the minimum tick size reform is undoubtedly one of the driving factors [1].

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In the Hong Kong stock market, low-priced stocks (usually referring to stocks priced below HK$10) occupy a special position:

• High proportion: The proportion of penny stocks in the Hong Kong market is significantly higher than in most other major markets [4]
• Severe liquidity divergence: A large number of low-priced stocks have extremely low daily turnover
• High retail participation: Low-priced stocks have always been the “main arena” for retail investors

For penny stocks in the HK$0.5-HK$1 range, the cost reduction reaches 50%; for stocks in the HK$1-HK$2 range, the cost reduction is as high as 75%. This makes:

• Small-scale transactions more cost-effective
• Position building and unwinding more flexible
• Stop-loss and take-profit strategies more precise

Lower bid-ask spreads encourage more investors to participate in low-priced stock trading, potentially forming a virtuous cycle of “liquidity begets liquidity”:

• Increased investor participation → Higher trading volume → Increased market depth → More investors willing to participate

Due to their low price base, absolute price changes have a greater impact on percentage returns for low-priced stocks. After reducing the minimum tick size:

• Stock prices can more accurately reflect changes in company fundamentals
• Reduces price distortion caused by minimum tick size constraints
• Helps identify genuine value investment opportunities

With improved market efficiency and lower transaction costs, institutional investors who were previously cautious about low-priced stocks due to insufficient liquidity may re-focus on this sector.

Smaller price tick sizes may exacerbate short-term price volatility:

• Frequent small-scale transactions may lead to rapid price fluctuations
• High-frequency traders may use smaller spreads for frequent arbitrage
• Increased market noise may mask real value signals

The policy itself does not change the quality of listed companies, and investors still need to identify and guard against the issue of fraudulent penny stocks among low-priced stocks. HKEX’s reform this time focuses mainly on optimizing trading mechanisms, rather than improving the quality of listed companies.

While overall liquidity may improve, structural divergence may still exist. Leading low-priced stocks may attract more capital, while liquidity improvements for tail-end stocks may be limited.

For low-priced stock investors:

• More precise entry/exit points
  : Use smaller price tick sizes to optimize entry timing
• Stricter position management
  : Low-cost trading may encourage over-trading, so discipline must be maintained
• Greater focus on fundamentals
  : After the improvement in price discovery efficiency, the divergence between high-quality low-priced stocks and fraudulent penny stocks will become more apparent

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High-priced stocks in the Hong Kong stock market (usually referring to stocks priced above HK$10) are mostly large-cap blue-chip stocks, such as:

• Tencent Holdings (00700.HK)
• Alibaba Group (09988.HK)
• Hong Kong Exchanges and Clearing (00388.HK), etc.

These stocks typically:

• Have high daily trading volumes
• Have a high proportion of institutional investors
• Are widely covered by research
• Have relatively sufficient liquidity

The adjustment scope of both the first and second phases focuses on the HK$0.5-HK$10 range, with minimal impact on high-priced stocks above HK$10. Although adjustments were made to the HK$10-HK$20 and HK$20-HK$50 ranges, the adjustment magnitude is relatively small.

When transaction costs for low-priced stocks are significantly reduced, the original liquidity advantage of high-priced stocks is relatively weakened, which may lead to some capital flowing from high-priced stocks to low-priced stocks.

The minimum tick size reform is part of a series of measures by HKEX to enhance market efficiency, forming a combined package with measures such as the abolition of minimum/maximum limits on securities transaction fees and the exploration of shortened settlement cycles [1]. The improvement in overall market efficiency benefits all stocks, including high-priced ones.

Improved liquidity for low-priced stocks may attract more investors to the Hong Kong stock market, expanding the overall investor base and indirectly facilitating capital inflows to high-priced stocks.

The improved price discovery efficiency of low-priced stocks helps enhance the overall pricing efficiency of the Hong Kong stock market, which may make the valuation of high-priced stocks more reasonable.

For high-priced stock investors:

• Focus on changes in relative value
  : When valuations of low-priced stocks are repaired, watch for potential undervaluation opportunities in high-priced stocks
• Maintain core allocations
  : The liquidity and research coverage advantages of high-priced stocks will not change in the short term
• Focus on linkage effects
  : The performance of the low-priced stock sector may impact indices, thereby affecting high-priced stocks

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Retail investors are the main participants in low-priced stocks, so the reduction in transaction costs has the most direct impact on them:

• Significant reduction in small-scale transaction costs
• More flexible entry/exit
• More precise execution of stop-loss/take-profit orders

• May induce over-trading
• Requires stronger risk management awareness
• Must remain vigilant against fraudulent penny stocks

Quantitative funds and high-frequency traders will benefit from smaller price changes:

• Increased arbitrage opportunities
• Strategies can be more refined
• Higher trading frequency is feasible

• Increased competition
• Profit margins may decline
• Higher requirements for system latency

Market makers face challenges in an environment with smaller spreads:

• Narrowing bid-ask spreads compress profit margins
• Increased difficulty in inventory management
• Requires more refined risk control

• Higher trading volume brings more business opportunities
• Increased market depth reduces execution risk

Institutional investors are relatively less affected, but they hold a positive attitude toward the improvement of the overall market environment:

• Improved feasibility of low-priced stock investments
• Enhanced overall market efficiency
• Increased international competitiveness

• Changes in transaction cost accounting
• Changes in liquidity distribution
• Evolution of market microstructure

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According to HKEX’s announcement, the key points of the second phase implementation are as follows [2]:

Item	Details
Implementation Time	Tentatively mid-2026
Scope of Application	Same as Phase 1 (HK$0.5-HK$10)
Adjustment Magnitude	Minimum tick size reduced by 50% (HK$0.01 → HK$0.005)
Preparation Work	End-to-end testing and market rehearsals will be arranged

• No adverse effects were observed in Phase 1, accumulating implementation experience
• Market participants have sufficient expectations and preparation time
• HKEX will conduct end-to-end testing to ensure system stability

• The number of low-priced stock transactions may further increase
• Need to monitor changes in market volatility
• Investor education needs to be continuously promoted

• Further reduction in transaction costs for low-priced stocks
• Possible periodic increase in market activity
• Need to monitor potential increases in volatility

• Gradual improvement in the liquidity divergence pattern
• Continuous improvement in price discovery efficiency
• Possible optimization of investor structure

• Enhanced international competitiveness of the Hong Kong market
• Further alignment with international market rules
• Attract more international capital allocation

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1. Use lower transaction costs to optimize entry timing
2. Maintain investment discipline and avoid over-trading
3. Pay greater attention to company fundamentals and guard against risks of fraudulent penny stocks
4. Watch for valuation repair opportunities brought about by improved liquidity

1. Maintain core allocations and avoid significant adjustments due to increased attractiveness of low-priced stocks
2. Focus on changes in relative value and look for potential undervaluation opportunities
3. The improvement in overall market efficiency is also beneficial to held stocks

1. Seize opportunities to optimize strategies brought about by more precise price changes
2. Be aware of the risk of declining profit margins due to increased competition
3. Monitor the impact of changes in market microstructure on strategies

• Volatility of low-priced stocks may increase
• Structural divergence may persist
• External factors may offset policy effects

• Trading systems need to adapt to higher transaction frequencies
• Risk control models need to be updated
• Need to fully participate in testing sessions

• The implementation time of Phase 2 may change
• Regulatory policies may be adjusted
• Need to pay attention to subsequent supporting measures

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HKEX’s reduction in the minimum stock tick size is an important reform aimed at enhancing market liquidity and trading efficiency. From the implementation results of Phase 1, the policy objectives are gradually being achieved:

1. Improved Liquidity
   : Bid-ask spreads have narrowed, transaction costs have been reduced, and market activity has increased
2. Enhanced Efficiency
   : Price discovery function has been optimized, and transaction execution is more precise
3. Increased International Competitiveness
   : Rules are more aligned with international standards, enhancing the attractiveness of the Hong Kong market

• Transaction costs have been significantly reduced (up to 75% in some intervals)
• Strong expectations of improved liquidity
• Need to be vigilant against the risk of increased volatility

• Direct impact scope is limited
• Indirectly benefits from the improvement in overall market efficiency
• Relative advantages may be diluted

Looking ahead to Phase 2, HKEX will advance the reform based on experience from Phase 1, and market participants should be better prepared. In the long term, this reform will help improve the microstructure of the Hong Kong stock market and enhance Hong Kong’s competitiveness as an international financial center.

While seizing the opportunities brought by the policy, investors should also pay attention to related risks and maintain a prudent investment attitude.

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[1] Hong Kong Exchanges and Clearing - HKEX 2025 Review (https://www.hkex.com.hk/News/News-Release/2025/251222news?sc_lang=zh-HK)

[2] Securities Times - HKEX: The Second Phase of Minimum Tick Size Reduction Will Be Implemented in Mid-2026 (https://www.stcn.com/article/gmg.html)

[3] China Securities Journal - Insufficient Liquidity Restricts Hong Kong Stock Market Performance; Industry Experts Suggest Comprehensive Solutions (https://www.cs.com.cn/gppd/ggzx/202512/t20251222_6529400.html)

[4] Hong Kong Exchanges and Clearing - Consultation Paper on Enhancing the Board Lot Framework for the Hong Kong Securities Market (https://www.hkex.com.hk/-/media/HKEX-Market/News/Market-Consultations/2016-Present/December-2025-Board-Lot-Framework-Enhancements/Consultation-Paper/cp202512_c.pdf)

[5] HKEX Group - Building Connected Product Ecosystems that Drive Liquidity (https://www.hkexgroup.com/Media-Centre/Insight/Insight/2025/Brian-Roberts/Building-Connected-Product-Ecosystems-that-Drive-Liquidity?sc_lang=zh-HK)