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Decimal Trading and Market Impact

Author

Listed:
  • Chakravarty, Sugato
  • Wood, Robert A.
  • Harris, Stephen P.

Abstract

Using high-frequency data and a carefully constructed 1-1 matched sample of control (non-decimal) stocks, we isolate the effects of decimalization for a sample of NYSE-listed common stocks trading in decimals. We find that both quoted and effective bid-ask spreads and depths have declined significantly following decimalization. Both trades and trading volume have declined significantly in all trade size, as well as in all stock size, categories. Stock return volatilities display an initial increase but a decline over the longer term probably as traders become more comfortable in their new milieu. Finally, although there is some evidence of increased presence among regional stock exchanges in the wake of decimalization, the NYSE still appears to be very much in the lead in all categories. Our results have important research and policy implications.

Suggested Citation

  • Chakravarty, Sugato & Wood, Robert A. & Harris, Stephen P., 2002. "Decimal Trading and Market Impact," Purdue University Economics Working Papers 1154, Purdue University, Department of Economics.
    • Handle: RePEc:pur:prukra:1154
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    Cited by:

    1. Chakravarty, Sugato & Harris, Fredreck H. deB. & Wood, Roger A., 2001. "Do Bid-Ask Spreads or Bid and Ask Depths Convey New Information First?," Purdue University Economics Working Papers 1149, Purdue University, Department of Economics.
    2. Craig H. Furfine, 2003. "Decimalization and market liquidity," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 27(Q IV), pages 2-12.

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