Publication Type
Journal Article
Version
acceptedVersion
Publication Date
12-2004
Abstract
Recent studies show that decimal pricing led to significant reductions in the spread and depth on the NYSE. In this paper, we examine how the observed changes in the spread and depth can be attributed to different factors. We show that stocks with higher proportions of one-tick spreads and odd-sixteenth quotes, and more frequent trading before decimalization experienced larger declines in the spread and depth afterwards. We interpret this result as evidence of reduced binding constraints and increased price competition under decimal pricing. We also find that decimal pricing led to nontrivial changes in select stock attributes, and that these changes exerted an additional impact on spreads and depths. Our results suggest that sub-penny pricing may further reduce the spreads of high-volume, low-risk, or low-price stocks.
Keywords
Binding constraint, tick size, stepping ahead, spreads, depths, decimal pricing
Discipline
Business | Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Banking and Finance
Volume
28
Issue
12
First Page
2981
Last Page
3007
ISSN
0378-4266
Identifier
10.1016/j.jbankfin.2003.11.001
Publisher
Elsevier
Citation
DING, David K.; Chuang, K.H.; and Chearoenwong, C..
Penny Pricing and the Components of Spread and Depth Changes. (2004). Journal of Banking and Finance. 28, (12), 2981-3007.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/1156
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jbankfin.2003.11.001