Sixteenths: Direct Evidence on Institutional Execution Costs
AbstractIn June 1997, the Nasdaq stock market and the New York Stock Exchange (NYSE) each lowered its minimum price increment on most stocks from eighths to sixteenths. Like other researchers investigating similar events, we find that quoted spreads and effective spreads decline on both markets with the introduction of sixteenths. However, spreads do not necessarily measure the cost of trading, particularly for market participants who execute larger orders over time. In this paper, we use a sample of institutional trades provided by the Plexus Group to directly measure the effect of the tick size reduction on execution costs. For these institutions, average execution costs actually increase post-sixteenths. More importantly, we find strong evidence that the costs of trading increase substantially for traders that demand liquidity. Specifically, while the cost of executing small orders (less than 1,000 shares) declines, the cost of executing large orders (greater than 100,000 shares) increases and the average execution costs for momentum traders increases. We also find that the cost of executing orders that are not worked by the trading desk increases, and there is an increase in the proportion of orders that are worked. These findings emphasize that spreads are not a sufficient statistic for measuring market quality; they also suggest that smaller price increments reduce market liquidity.
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Bibliographic InfoPaper provided by Columbia - Graduate School of Business in its series Papers with number 99-3.
Length: 37 pages
Date of creation: 1999
Date of revision:
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Postal: U.S.A.; COLUMBIA UNIVERSITY, GRADUATE SCHOOL OF BUSINESS, PAINE WEBBER , New York, NY 10027 U.S.A
Phone: (212) 854-5553
Web page: http://www.columbia.edu/cu/business/
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FINANCIAL MARKET ; PRICES;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G19 - Financial Economics - - General Financial Markets - - - Other
- G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
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- Naes, Randi & Skjeltorp, Johannes A., 2003. "Equity trading by institutional investors: Evidence on order submission strategies," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1779-1817, September.
- David Abad & Mikel Tapia, 2003. "Impacto Sobre El Mercado Bursatil Español De Los Cambios En Las Variaciones Mínimas De Precios Tras La Introducción Del Euro," Working Papers. Serie EC 2003-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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