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April 30, 2001

Study Finds Lower Spreads On Nasdaq Stock Market

By Gregory Bresiger

Decimalization appears to have reduced quoted spreads on the Nasdaq by 3.7 cents and is providing more benefits than those stocks on the Big Board. Spreads are also narrower using decimals in Nasdaq stocks compared to a matched sample of NYSE control stocks that are already trading in decimals.

Those are the results of a study conducted by two academics and an official of Bridge Information Systems. The study took place between March 12 and March 30 of this year.

"Both quoted and effective spreads have narrowed significantly following decimalization - even after controlling for other market influences through the matching control stocks. Quoted and effective spreads in decimal stocks have declined an average of 49 percent and 56 percent [respectively], compared to a decrease of 28 percent and 12 percent [respectively] in Nasdaq control stocks," according to "Decimal Trading and Market Impact: The Nasdaq Experience."

Price Competition

The study's authors are Sugato Chakravarty of Purdue University, Robert Wood of the University of Memphis and Stephen P. Harris of Bridge Information Systems. The study also concluded that spreads were narrower in Nasdaq stocks compared to a comparable group of NYSE stocks.

The trio said that, "A possible implication of our findings is that, following the removal of the barriers to price competition through penny pricing grids, a competitive dealer market is more conducive to price competition than a specialist market system."