Their Change Shape ability is similar to Disguise Self, with the same limitations.
The differences are that their ability is supernatural, it affects only their body, not their equipment, it's not an illusion (opposed to the spell) and it last until changed again (or death).
As Disguise Self allows only 1 foot of size variation, a changeling cannot really look like a gnome or a halfling, unless his original size is already quite small.
I seem to remember the 3.5 Changling source book telling a story of a great changling who had dozens and dozens of personas, from dwarf to orc, so I got the impression they could change from 3 foot high to about 9 foot. Maybe that was just artistic license.
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Can the Changelings from Eberron change shape into a small creature, such as a halfling or gnome?
Officially, no. In textual 'fluff' examples, changelings pretending to be gnomes are mentioned in at least one Eberron book (Sharn has changelings pretending to be halflings, IIRC).
Options;
1) Allow it as a special exception to how the disguise self spell works, since it's not really disguise self anyway, but an actual physical transformation, perhaps including some flavor text about how Changelings in their true form are 'on the cusp' and only just barely count as size Medium, being shorter and slenderer than most other medium races, but taller than any halfling or gnome.
2) A weaker alternative would be to allow a Changeling PC to choose at 1st level if he is a Small Changeling or a Medium Changeling. Small Changelings disguise themselves as halflings, gnomes, kobolds and goblins, for the most part, while Medium Changelings take on human, orc, elven, dwarven, etc. forms. They would be the exact same race, and represent dopplegangers in ancient times breeding with both medium and small races, creating the potential that a Changeling would be born with either size option (although, most commonly, a Changeling would have the same size as its parents!).
3) Yet another option would to just use size Medium Changelings, and allow a specialist to use a Feat to enhance it's racial shapechanging ability to assume Small sized humanoid forms.
Other 'Changeling Feats' might allow one to assume some of the natural armor, exceptional abilities or natural weaponry of forms assumed, turning into a gnoll to bite someone or turning into a lizardfolk to gain a racial swim bonus or whatever, like a weaker variation on alter self that can only grant certain bonuses based on total HD (so, no turning into a lizardfolk to get natural armor +5 at 1st level!).