Sixteenths: Direct Evidence on Institutional Execution Costs

Paine Webber Working Paper No. 99-03

35 Pages Posted: 7 Oct 1999

See all articles by Charles M. Jones

Charles M. Jones

Columbia Business School

Marc L. Lipson

University of Virginia - Darden School of Business

Date Written: August 1999


In June 1997, the New York Stock Exchange (NYSE) lowered its minimum price increment on most stocks from eighths to sixteenths. Like other researchers investigating similar events, we find that quoted spreads and effective spreads decline with the introduction of sixteenths. However, spreads do not necessarily measure the cost of trading, particularly for market participants who execute larger orders over time. In this paper, we use a sample of institutional trades provided by the Plexus Group to directly measure the effect of the tick size reduction on execution costs. For these institutions, average execution costs actually increase post-sixteenths. More importantly, we find strong evidence that the costs of trading increase substantially for traders that demand liquidity. Specifically, while the cost of executing small orders (less than 1,000 shares) declines, the cost of executing large orders (greater than 100,000 shares) increases and the average execution cost for momentum traders increases. We also find that the cost of executing orders that are not worked by the trading desk increases, and there is an increase in the proportion of orders that are worked. These findings emphasize that spreads are not a sufficient statistic for measuring market quality; they also suggest that smaller price increments reduce market liquidity.

JEL Classification: G10, G19, G20, G23

Suggested Citation

Jones, Charles M. and Lipson, Marc Lars, Sixteenths: Direct Evidence on Institutional Execution Costs (August 1999). Paine Webber Working Paper No. 99-03. Available at SSRN: or

Charles M. Jones (Contact Author)

Columbia Business School ( email )

3022 Broadway
Uris Hall Rm 101
New York, NY 10027
United States
(212) 854-4109 (Phone)

HOME PAGE: http://

Marc Lars Lipson

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)


Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics