Decimal Trading and Market Impact

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. JEL classification: