Commentary

Jared Dillian
Traders Magazine Online News

The Liquidity Problem

Maudlin Economics Jared Dillian examines stock market liquidity.

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July 31, 2003

The Academic Research on Both Sides

By Editorial Staff

While bid-ask spreads have narrowed under decimal pricing, some academic studies note the detrimental effect decimalization has had on overall trading costs, execution quality and liquidity. Other studies, however, show the market adjusting positively.

"Decimal Trading and Market Impact" by Sugato Chakravarty, Stephen P. Harris and Robert A. Wood, 2001.

Conclusion: Mixed verdict on market liquidity because of lower spreads and less depth.

"Has Decimalization Hurt Institutional Investors? An Investigation into Trading Costs and Order Routing Practices of Buyside Institutions" by Sugato Chakravarty, Venkatesh Panchapagesan and Robert A. Wood, 2003.

Conclusion: Liquidity is not more costly, although traders are trading in smaller size.

"Clustering in U.S. Stock Prices After Decimalization" by David Ikenberry and James P. Weston, 2003

Conclusion: Traders gravitate toward penny and nickel increments anyway, so shifting to a larger tick wouldn't change much.