Decimalization and competition among stock markets: Evidence from the Toronto Stock Exchange cross-listed securities (original) (raw)
Related papers
The competitive effects of US decimalization: Evidence from the US-listed Canadian stocks
Journal of Banking and Finance, 2003
This paper analyzes the impact of US decimalization on the Canadian stocks listed on the Toronto Stock Exchange (TSE) and either the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotation System (Nasdaq) in the US. Using a sample of 126 firms, we find that the US trading of these stocks increases after decimalization, but this increase is not at the expense of TSE volume. Indeed, the TSE volume increases substantially for those securities that are traded on Nasdaq and increases marginally for those securities that are traded on the NYSE. Most of the increase in volume is in retailsized trades. The bid-ask spreads and the quote depths decline on all exchanges, but by a greater amount in the US than in Canada. The depths on the NYSE decline from being above the TSE depths to well below the TSE depths. We also find that the decline in the TSE spread is directly related to the size of the firm and to the decline in the US spread, and is inversely related to the pre-decimalization ratio of spreads on the US exchange and the TSE. Overall, our results indicate that the US decimalization had the desired positive impact on trading in both the US and Canada, with a decrease in spreads and an increase in retail-sized trading.
Order preferencing and market quality on NASDAQ before and after decimalization
Journal of Financial Economics, 2004
Despite the widely held belief that order preferencing affects market quality, no hard evidence exists on the extent and determinants of order preferencing and its impact on dealer competition and execution quality. This study shows that the bid-ask spread (dealer quote aggressiveness) is positively (negatively) related to the proportion of internalized volume during both the pre-and post-decimalization periods. Although decimal pricing led to lower order preferencing on NASDAQ, the extent of order preferencing after decimalization is higher than what prior studies had predicted. The price impact of preferenced trades is smaller than that of unpreferenced trades and preferenced trades receive greater (smaller) size (price) improvements than unpreferenced trades. r
The effect of decimalization on the components of the bid-ask spread
Journal of Financial Intermediation, 2003
Previous empirical studies that decompose the bid-ask spread were done when securities traded in discrete price points equal to one-sixteenth or one-eighth of a dollar. These studies concluded that inventory and adverse-selection costs were economically insignificant compared to order-processing costs. Natural questions arise as to: (i) whether price discreteness allowed market makers to enjoy excess rents, thus reducing the significance of the inventory and adverse selection costs; (ii) whether discreteness decreased the traders' incentives to gather information; or (iii) whether methodologies previously employed mis-estimated the inventory and the adverseselection costs. We show that the recent conversion to decimal pricing results in significantly tighter spreads. However, the dollar value of spreads attributed to adverse selection and inventory costs do not change significantly. Almost all of the reduction occurs in the order-processing component. As a result, inventory and adverse-selection costs now account for a significantly larger proportion of the traded spreads. A plausible explanation is that the minimum tick size constraint previously in place under fractional pricing allowed market makers to enjoy spreads that were larger than their actual costs.
2002
We examine the effect of decimalization on institutional investors using proprietary data. We find no evidence that decimalization has increased trading costs for institutions. In fact, we find an average decrease of 13 basis points, or roughly $224 million a month in savings of institutional trading costs following the move to decimal trading. We find little differences in institutional order routing practices overall though smaller and easier to fill orders are routed more often to electronic brokers while larger and more difficult to fill orders are sent to traditional brokers following decimalization. There is an increase in trading costs of orders routed to electronic and independent research brokers, while costs of trading with full service and soft dollar brokers have gone down. Interestingly, we find a reduced usage of soft dollar brokers suggesting that decimalization may have altered the incentives of this multi-billion dollar industry. Our results survive extensive partitioning of the data and differ in spirit from those reported around the transition of the minimum tick size from eighths to sixteenths. Our results are also surprising in light of an oft-repeated complaint among professional traders that liquidity is hard and expensive to find in a post-decimal trading milieu. Our findings have important regulatory implications.
Decimal Trading and Market Impact
SSRN Electronic Journal, 2000
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 decimalization has resulted in significantly lower quoted and effective bid/ask spreads and that the most popular quoted spread is 1 cent. The available depths at the best bid and ask prices are also significantly lower. Together, these spread-depth results deliver a mixed verdict on market liquidity after decimalization. We find that decimalization has resulted in significant increases (decreases) in relatively smaller size (larger size) trades and trading volume. The frequency of quote updates and autoquotes in decimal stocks following decimalization has also increased significantly. Regional stock exchanges also appear to be significantly more active in competing for order flow. Our results have important research and policy implications.
Adverse selection costs for NASDAQ and NYSE after decimalization
International Review of Financial Analysis, 2009
a b s t r a c t respectively. In this paper, we compare adverse selection component of the bid-ask spread for NASDAQ and NYSE stocks after decimalization using the data from May 2001 and July 2001. We find that the adverse selection component of the bid-ask spread is significantly lower on NASDAQ than on NYSE, and these differences cannot be attributed to the differences in the characteristics of the stocks traded in the two markets. In addition, we find that the adverse selection costs increase with trade size on NYSE, however there is no monotonic pattern observed for NASDAQ stocks. Lastly, we report that although the order flows arrived in the two markets are significantly different, they can at best explain a small portion of the observed differences in adverse selection costs.
Tick Size and Trading Costs: NYSE vs. Nasdaq
SSRN Electronic Journal, 2000
Theory suggests that a reduction in tick size will cause spreads to narrow on the NYSE due to the time priority rule which encourages specialists and traders to improve price. The effect of tick size on spreads is likely to be small in dealer markets (such as Nasdaq) because dealers have little incentive to improve price. Our empirical results show that the tick size reduction has no impact on the spread of Nasdaq issues that were not subjected to the new order handling rules (OHR). In contrast, the tick size reduction has a significant effect on the spread of NYSE issues and Nasdaq issues that were subjected to the OHR. These results indicate that the new OHR compel Nasdaq dealers and limit order traders to compete on price to obtain order flow. We find that the tick size change has a significant effect on the quoted depth of NYSE issues, but no effect on the quoted depth of Nasdaq issues. Our results indicate that decimalization is likely to narrow spreads, decrease dealer payments for order flow, and reduce order preferencing arrangements.
Has decimalization hurt institutional investors
2003
We examine the effect of decimalization on institutional investors using proprietary data. We find no evidence that decimalization has increased trading costs for institutions. In fact, we find an average decrease of 13 basis points, or roughly $224 million a month in savings of institutional trading costs following the move to decimal trading. We find little differences in institutional order routing practices overall though smaller and easier to fill orders are routed more often to electronic brokers while larger and more difficult to fill orders are sent to traditional brokers following decimalization. There is an increase in trading costs of orders routed to electronic and independent research brokers, while costs of trading with full service and soft dollar brokers have gone down. Interestingly, we find a reduced usage of soft dollar brokers suggesting that decimalization may have altered the incentives of this multi-billion dollar industry. Our results survive extensive partitioning of the data and differ in spirit from those reported around the transition of the minimum tick size from eighths to sixteenths. Our results are also surprising in light of an oft-repeated complaint among professional traders that liquidity is hard and expensive to find in a post-decimal trading milieu. Our findings have important regulatory implications.
International Review of Financial Analysis, 2009
We analyze how U.S. decimalization affects stocks cross-listed in France (Euronext) and the U.S. (NYSE). The French stocks examined are much larger than the non-U.S. stocks examined in prior studies of decimalization, and their U.S. trading is likely to be dominated by institutions. So, we explore whether a reduction in depths in the U.S. due to decimalization makes the U.S. market less competitive for institutions trading these French stocks. We find evidence consistent with the above. First, the average NYSE trade size for these stocks relative to that on Euronext declines substantially after decimalization. Second, we categorize individual trades by the number of shares traded. We find that mainly driven by large trades, the NYSE proportion of trading of French firms declines markedly after decimalization. Third, using regression analysis, we find that the decline in the U.S. share of institutional trading volume is significantly positively related with the decline in NYSE depths relative to Euronext, and the decline is greater for French firms. Overall, we find consistent results indicating a migration of institutional order flow in French firms to France after NYSE decimalization. Also, intraday analysis indicates that the institutional volume in both France and the U.S. is greatest when both the markets are open. (S. Sabherwal).
The Impact of Pennies on the Market Quality of the Toronto Stock Exchange
The Financial Review, 2006
Using detailed order flow data from the Toronto Stock Exchange, this paper finds no evidence that a smaller tick size lessens market liquidity for either small or large traders. Rather, there is evidence of lower trading costs, faster time to order execution, and greater price continuity. Consistent with a penny tick allowing a finer pricing grid search, there is an increase in the number of Change Former Orders and cancellations.