Penny Pricing and the Components of Spread and Depth Changes

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-sixte...

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Main Authors: DING, David K., Chuang, K.H., Chearoenwong, C.
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2004
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1156
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2155/viewcontent/PennyPricing_2004_av.pdf
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spelling sg-smu-ink.lkcsb_research-21552021-03-29T01:58:39Z Penny Pricing and the Components of Spread and Depth Changes DING, David K. Chuang, K.H. Chearoenwong, C. 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. 2004-12-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/1156 info:doi/10.1016/j.jbankfin.2003.11.001 https://ink.library.smu.edu.sg/context/lkcsb_research/article/2155/viewcontent/PennyPricing_2004_av.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Binding constraint tick size stepping ahead spreads depths decimal pricing Business Finance and Financial Management Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Binding constraint
tick size
stepping ahead
spreads
depths
decimal pricing
Business
Finance and Financial Management
Portfolio and Security Analysis
spellingShingle Binding constraint
tick size
stepping ahead
spreads
depths
decimal pricing
Business
Finance and Financial Management
Portfolio and Security Analysis
DING, David K.
Chuang, K.H.
Chearoenwong, C.
Penny Pricing and the Components of Spread and Depth Changes
description 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.
format text
author DING, David K.
Chuang, K.H.
Chearoenwong, C.
author_facet DING, David K.
Chuang, K.H.
Chearoenwong, C.
author_sort DING, David K.
title Penny Pricing and the Components of Spread and Depth Changes
title_short Penny Pricing and the Components of Spread and Depth Changes
title_full Penny Pricing and the Components of Spread and Depth Changes
title_fullStr Penny Pricing and the Components of Spread and Depth Changes
title_full_unstemmed Penny Pricing and the Components of Spread and Depth Changes
title_sort penny pricing and the components of spread and depth changes
publisher Institutional Knowledge at Singapore Management University
publishDate 2004
url https://ink.library.smu.edu.sg/lkcsb_research/1156
https://ink.library.smu.edu.sg/context/lkcsb_research/article/2155/viewcontent/PennyPricing_2004_av.pdf
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