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Fractional versus decimal pricing: Evidence from the UK Long Gilt futures market

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  • Owain Ap Gwilym
  • Ian Mcmanus
  • Stephen Thomas

Abstract

This paper analyses the impact of a move from fractional to decimal pricing in the UK Long Gilt futures market, and thus offers a unique insight to tick size reduction and decimalization in a derivatives market setting. The reduced tick size leads to an increase in price clustering. The bid‐ask spread, measured in ticks, increases following the tick size reduction. However, due to a reduced tick value, the monetary value of the spread declines. There is a substantial reduction in mean trade size as reduced‐depth orders become trades. The mean daily number of transactions increases, which is entirely consistent with increased volume and decreased mean trade size. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:419–442, 2005

Suggested Citation

  • Owain Ap Gwilym & Ian Mcmanus & Stephen Thomas, 2005. "Fractional versus decimal pricing: Evidence from the UK Long Gilt futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(5), pages 419-442, May.
    • Handle: RePEc:wly:jfutmk:v:25:y:2005:i:5:p:419-442
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    Cited by:

    1. Ivan Indriawan & Feng Jiao & Yiuman Tse, 2019. "The impact of the US stock market opening on price discovery of government bond futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(7), pages 779-802, July.
    2. Thanos Verousis & Pietro Perotti & Georgios Sermpinis, 2018. "One size fits all? High frequency trading, tick size changes and the implications for exchanges: market quality and market structure considerations," Review of Quantitative Finance and Accounting, Springer, vol. 50(2), pages 353-392, February.
    3. Ashton, John K. & Hudson, Robert S., 2008. "Interest rate clustering in UK financial services markets," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1393-1403, July.
    4. Mike Derksen & Bas Kleijn & Robin de Vilder, 2020. "Effects of MiFID II on stock price formation," Papers 2003.10353, arXiv.org, revised Aug 2020.
    5. Kiril Alampieski & Andrew Lepone, 2009. "Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(1), pages 1-20, March.
    6. Sunil S. Poshakwale & Jude W. Taunson & Anandadeep Mandal & Michael Theobald, 2019. "Lower tick sizes and futures pricing efficiency: evidence from the emerging Malaysian market," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1135-1163, November.

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