Quote Limits Rule and Stock Market Efficiency: Evidence From a Regression Discontinuity Design

ABSTRACT On April 10, 2023, China's Main Board stock market implemented a new quote limits rule, restricting the range of permissible order prices. Utilizing a regression discontinuity design (RDD), this study investigates the causal effect of this rule on stock market efficiency. We find that the rule leads to a significant reduction in pricing errors, indicating improved market efficiency. In addition, the rule is associated with a decrease in medium‐sized orders, fewer large price jumps, and a lower probability of end‐of‐day manipulation, suggesting that the rule improves market efficiency primarily by constraining manipulative trading activities from financially advantaged investors (e.g., institutional investors). Consistent with this manipulation‐curbing explanation, the rule's positive impact is more pronounced for small‐capitalization and low‐liquidity stocks, which are typically more vulnerable to price manipulation. Our findings provide robust causal evidence on the efficacy of quote limits in mitigating stock price manipulation and offer valuable regulatory insights for emerging markets.