The Degree of Price Resolution and Equity Trading Costs

Abstract

This paper investigates relations between several measures of trade execution costs and price rounding practices for sets of NYSE and Nasdaq listed firms. Percentage execution costs on each exchange are found to be positively related to the rounding of transaction prices and quotes, both in the cross-section and when comparing across trades within firms. However, after controlling for variation in market making costs attributable to trades' information content, there is a strong positive relation between execution costs and price rounding frequencies for Nasdaq issues, but not for NYSE issues. These empirical findings are consistent with the assertion that price rounding conventions have effectively increased bid-ask spreads and trade execution costs on the Nasdaq market.

JEL Classification: G18, D40, L10