Decimalization and Competition Among Exchanges: Evidence from the Toronto Stock Exchange Cross-Listed Securities
Posted: 19 Feb 1997
Date Written: December 1996
The Toronto Stock Exchange (TSE) switched from a fractional to a decimal trading system on April 15, 1996. This paper examines the impact of decimalization on the competition for order flows between Canadian and U.S. exchanges by analyzing TSE stocks cross-listed on U.S. exchanges. We find that order flows do not migrate from U.S. exchanges to the TSE, although the effective spreads declined by 16-27% for cross-listed stocks traded on the TSE. For TSE stocks traded on the NYSE and AMEX, there is no change in the spread and trading volume, while TSE stocks traded on Nasdaq experienced a 8% spread reduction but no change in trading volume. Our results are consistent with the hypotheses that (1) the savings in transaction costs on the TSE are not sufficient to offset the benefits of trading on the NYSE and AMEX and that (2) Nasdaq dealers might not operate as efficiently as perfect competition warrants.
JEL Classification: G10, G18, G20
Suggested Citation: Suggested Citation