The Effect of Decimalization on Trade Size and Adverse Selection Costs

14 Pages Posted: 22 Sep 2005

See all articles by Sugato Chakravarty

Sugato Chakravarty

Purdue University

Bonnie F. Van Ness

University of Mississippi - Department of Finance

Robert A. Van Ness

University of Mississippi - Department of Finance

Abstract

We examine adverse selection costs around NYSE decimalization. Further, we analyze the relation between adverse selection costs and trade size. We find a significant increase in the percentage adverse selection cost and a reduction in dollar adverse selection cost (percentage adverse selection multiplied by the spread) following complete decimalization on the NYSE. On estimating the adverse selection components by trade size classes, we find a decline in dollar adverse selection costs in trades of all sizes, with the strongest evidence coming from medium size trades, followed by small and large size trades. One implication of our findings is that there appears to be less stealth trading following complete decimalization and less institutional trading overall.

Suggested Citation

Chakravarty, Sugato and Van Ness, Bonnie F. and Van Ness, Robert A., The Effect of Decimalization on Trade Size and Adverse Selection Costs. Journal of Business Finance & Accounting, Vol. 32, No. 5-6, pp. 1063-1081, June 2005. Available at SSRN: https://ssrn.com/abstract=809687

Sugato Chakravarty

Purdue University ( email )

Consumer Sciences
1262 Matthews Hall Rm 214F
West Lafayette, IN 47906
United States
765-494-6427 (Phone)
765-494-0869 (Fax)

HOME PAGE: http://web.ics.purdue.edu/~sugato

Bonnie F. Van Ness (Contact Author)

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States
662-915-6749 (Phone)
662-915-7968 (Fax)

Robert A. Van Ness

University of Mississippi - Department of Finance ( email )

Oxford, MS 38677
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
30
Abstract Views
774
PlumX Metrics