Trading Costs and Quote Clustering on the NYSE and NASDAQ after Decimalization

Abstract

We examine execution costs and quote clustering on the NYSE and NASDAQ using 517 matching pairs of stocks after decimalization. We find that the mean spread of NASDAQ stocks is greater than the mean spread of NYSE stocks when spreads are equally weighted across stocks and the difference is greater for smaller stocks. In contrast, the mean NASDAQ spread is narrower than the mean NYSE spread when spreads are volume-weighted and the difference is statistically significant for large stocks. Both NYSE and NASDAQ stocks exhibit high degrees of quote clustering on nickels and dimes and quote clustering has a significant effect on spreads in both markets.

Keywords: Trading cost, Decimal pricing, Quote clustering, Averaging method

JEL Classification: G14, G18