Decimal Trading and Market Impact

53 Pages Posted: 26 Apr 2001

See all articles by Sugato Chakravarty

Sugato Chakravarty

Stephen P. Harris

Bridge Information Systems

Robert Wood

University of Memphis - Fogelman College of Business and Economics

Date Written: March 26, 2001

Abstract

Using high-frequency data and a carefully constructed 1-1 matched sample of control (non decimal) stocks, we isolate the effects of decimalization for a sample of NYSE-listed common stocks trading in decimals. We find that decimalization has resulted in significantly lower quoted and effective bid/ask spreads and that the most popular quoted spread is 1 cent. The available depths at the best bid and ask prices are also significantly lower. Together, these spread-depth results deliver a mixed verdict on market liquidity after decimalization. We find that decimalization has resulted in significant increases (decreases) in relatively smaller size (larger size) trades and trading volume. The frequency of quote updates and autoquotes in decimal stocks following decimalization has also increased significantly. Regional stock exchanges also appear to be significantly more active in competing for order flow. Our results have important research and policy implications.

Keywords: Decimalization, bid/ask spread, trading, stock exchange

Suggested Citation

Chakravarty, Sugato and Harris, Stephen P. and Wood, Robert A., Decimal Trading and Market Impact (March 26, 2001). Available at SSRN: https://ssrn.com/abstract=266877 or http://dx.doi.org/10.2139/ssrn.266877

Stephen P. Harris

Bridge Information Systems ( email )

3 World Financial Center
New York, NY 10281
United States

Robert A. Wood

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States
901-678-2670 (Phone)
901-678-3006 (Fax)

HOME PAGE: http://www.people.memphis.edu/~rwood/

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