Order Preferencing and Market Quality on NASDAQ Before and After Decimalization

43 Pages Posted: 7 May 2003  

Kee H. Chung

State University of New York at Buffalo - School of Management

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

Tim McCormick

U.S. Securities and Exchange Commission

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Abstract

Despite the widely held belief that order preferencing affects market quality, no hard evidence exists on the extent and determinants of order preferencing and its impact on dealer competition and execution quality. This study shows that the bid-ask spread (dealer quote aggressiveness) is positively (negatively) related to the proportion of internalized volume during both the pre- and post-decimalization periods. Although decimal pricing led to lower order preferencing on NASDAQ, the proportion of preferenced volume after decimalization is much higher than what some prior studies had predicted. The price impact of preferenced trades is smaller than that of unpreferenced trades and preferenced trades receive greater (smaller) size (price) improvements than unpreferenced trades.

JEL Classification: G18, G19

Suggested Citation

Chung, Kee H. and Chuwonganant, Chairat and McCormick, Tim, Order Preferencing and Market Quality on NASDAQ Before and After Decimalization. Available at SSRN: https://ssrn.com/abstract=393560 or http://dx.doi.org/10.2139/ssrn.393560

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

Chairat Chuwonganant

Indiana University Purdue University Fort Wayne

2101 E. Coliseum Blvd.
Fort Wayne, IN 46805
United States

Tim McCormick

U.S. Securities and Exchange Commission ( email )

United States Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
United States
202-551-6633 (Phone)

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