Penny Pricing and the Components of Spread and Depth Changes

39 Pages Posted: 31 Oct 2003

See all articles by Kee H. Chung

Kee H. Chung

State University of New York at Buffalo - School of Management

Charlie Charoenwong

Nanyang Technological University (NTU)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business

Date Written: October 2003

Abstract

Recent studies show that decimal pricing led to significant reductions in the spread and depth on the NYSE. In this paper, we examine how the observed changes in the spread and depth can be attributed to different factors. We show that stocks with higher proportions of one-tick spreads and odd-sixteenth quotes, and more frequent trading before decimalization experienced larger declines in the spread and depth afterwards. We interpret this result as evidence of reduced binding constraints and increased price competition under decimal pricing. We also find that decimal pricing led to nontrivial changes in select stock attributes, and that these changes exerted an additional impact on spreads and depths. Our results suggest that sub-penny pricing may further reduce the spreads of high-volume, low-risk, or low-price stocks.

Keywords: binding constraint, tick size, stepping ahead, spreads, depths, decimal pricing

JEL Classification: G14, G18

Suggested Citation

Chung, Kee H. and Charoenwong, Charlie and Ding, David K., Penny Pricing and the Components of Spread and Depth Changes (October 2003). Available at SSRN: https://ssrn.com/abstract=458600 or http://dx.doi.org/10.2139/ssrn.458600

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

Charlie Charoenwong

Nanyang Technological University (NTU) ( email )

Nanyang Business School, BF Division
S3-01c-104
Singapore, 639798
Singapore
+65 6790 4799 (Phone)
+65 6791 3697 (Fax)

David K. Ding

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828-0245 (Phone)

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