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Ronald Jordan
Traders Magazine Online News

Understanding Your Data is No Longer Optional

In this contributed article from Global Markets Advisory Group, the advisory discusses the importance of data and how organizations should augment existing skill sets and capabilities to add a data-focused perspective to their operating fabric.

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February 1, 2001

Institutions Pay Price For Decimal Trading

By Gregory Bresiger

Told you so. That's what some traders are privately saying about a coming report that will reveal how institutional trading costs have soared since a bunch of stocks on the New York Stock Exchange switched to decimal trading.

A study by the University of Georgia and Columbia University will show that institutional trading costs have risen by about one half since the switch to decimals, according to a report in BusinessWeek.

"This move to decimals was also political. I warned Congress that this would happen, but they wanted to do this in order to look good even though they were told it would not decrease spreads," said one source at the Big Board.

What's gone wrong? While decimals may benefit orders placed by individuals, they have hurt institutions, which are placing fewer limit orders. Decimals discourage limit orders, traders say.

"They tighten up spreads but increase volatility," said Michael Barone, a Nasdaq trader with William Blair & Company in Chicago. That drives up trading costs for institutional buyers such as pension funds and mutual funds. Barone adds that will mean many mutual funds and other institutional investors are not able to execute some trades at the desired price.

A study by Babson College and the University of Pennsylvania found the volume of stock offered through limit orders declined by 50 percent when the Big Board moved from eighths to sixteenths in 1997.