Execution Quality for Institutional Orders Routed to NASDAQ Dealers Before and after Decimals

Abstract

This paper uses unique order data to examine execution quality for institutional market and limit orders routed to Nasdaq dealers around the introduction of decimals. Despite the complaints voiced by institutional traders, there is no evidence in this data that execution quality deteriorated following decimalization. Average dollar trading costs per share cross all order types fell from 38.9 to 17.8 (21.2 to 14.3) cents per share compared to mid-quotes at the open (order arrival). Trading costs for market orders fell from 51.4 to 28.1 (25.9 to 18.0) cents per share and for marketable limit order from 8.2 to -10.6 (15.6 to 8.7) cents per share. At the same time, the rewards for providing liquidity by submitting limit orders fell. Even though there was a significant stock price drop between the pre- and post-sample periods, average trading costs for marketable orders when measured in basis points did not increase significantly. Controlling for order characteristics and market conditions does not change this conclusion. The evidence also shows that execution quality continued to improve the year after the move to decimals.

Keywords: Execution quality, institutional trading, Nasdaq, decimals

JEL Classification: G14, G18, G23, G24